Show your work please A specialized part is used in one of our company\'s most p
ID: 2499443 • Letter: S
Question
Show your work please
A specialized part is used in one of our company's most popular products. We know the following costs of producing the 15,500 units of the part that are needed every year. An outside supplier has offered to make the part and sell it to the company for $26.00 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The unique equipment used to make the part was purchased 15 years ago and has no salvage value or other use. The allocated company overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $21,500 of these allocated company overhead costs would be avoided. Prepare a report that shows the effect on the company's total net operating income of buying the part from a supplier rather than continuing to make it inside the company. Should we make or buy the part? Why?Explanation / Answer
Answer a. Calculation of Incremental Profit Particulars Amount Purchase of Part From Supplier (15500 Units @ $26) ($403,000) Saving of Direct Material Cost (15500 Units @ $2.40) $37,200 Saving of Direct LAbourl Cost (15500 Units @ $3.40) $52,700 Saving of Variable Overhead (15500 Units @ $6.20) $96,100 Saving of Suprevisor Salary (15500 Units @ $6.70) $103,850 Saving of Company Overhead $21,500 Incremental Profit / (Loss) ($91,650) Answer b. The company should make the part as the profit will be decreased by $91650, if he buy the part from the supplier
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