Recher Corporation uses part Q89 in one of its products. The company\'s Accounti
ID: 2508768 • Letter: R
Question
Recher Corporation uses part Q89 in one of its products. The company's Accounting Department reports the following costs of producing the 7,100 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 $25.00 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $4,800 of these allocated general overhead costs would be avoided. In addition, the space used to produce part Q89 could be used to make more of one of the company's other products, generating an additional segment margin of $17,400 per year for that product.
Required:
a. Prepare a report that shows the financial impact of buying part Q89 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?
Per Unit Direct materials $ 6.80 Direct labor $ 3.80 Variable overhead $ 7.50 Supervisor's salary $ 2.90 Depreciation of special equipment $ 2.40 Allocated general overhead $ 1.30Explanation / Answer
Answer a A report that shows the financial impact of buying part Q89 from the supplier rather than continuing to make it inside the company. Making of Part Q89 Buying of Part Q89 Increase / (Decrease) in Profit if part bought from outside Direct Material $48,280.00 Direct Labour $26,980.00 Variable Overhead $53,250.00 Supervisor's salary $20,590.00 Depreciation of special equipment $17,040.00 Allocated general Overhead $9,230.00 $4,430.00 Purchase cost $177,500.00 Additional segment Margin -$17,400.00 Total Cost $175,370.00 $164,530.00 $10,840.00 Answer b Recher Corporation should accept the outside supplier offer to sell part for $25 each as this option lead to increase in company's margin by $10840.
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