Recher Corporation uses part Q89 in one of its products. The company\'s Accounti
ID: 2522222 • 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 9,800 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 $30.00 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 $2,900 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 $18,000 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? The total cost of the "make" alternative is (higher or lower?) by ???. Therefore the company should (buy or make?) the part.
Per Unit Direct materials $ 9.00 Direct labor $ 5.00 Variable overhead $ 9.90 Supervisor's salary $ 3.80 Depreciation of special equipment $ 3.20 Allocated general overhead $ 1.70Explanation / Answer
SOLUTION
(A)
(B) The total cost of the make alternative is lower by $1,640 ($276,000 - $274,360). Thus, net operating income would decline by $1,640 if the offer from the supplier were accepted. Therefore, the company should continue to make the part itself.
Make ($) Buy ($) Direct materials (9,800 units * $9) 88,200 Direct labor (9,800 units * $5) 49,000 Variable overhead (9,800 units * $9.90) 97,020 Supervisor’s salary (9,800 units * $3.80) 37,240 Depreciation of special equipment (not relevant) 0 Allocated general overhead (avoidable only) 2,900 Outside purchase price (9,800 units * $30) 294,000 Opportunity cost (18,000) Total cost 274,360 276,000Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.