Widget A is used in one of Hershey Corporation\'s products. The company makes 6,

Question

Widget A is used in one of Hershey Corporation's products. The company makes 6,000 units of this part each year. The company's Accounting Department reports the following costs of producing the part at this level of activity: Per Unit Direct materials $1.40 Direct labor $2.40 Variable manufacturing overhead $7.20 Supervisor's salary $3.60 Depreciation of special equipment $8.90 Allocated general overhead $4.50 An outside supplier has offered to produce this part and sell it to the company for $16.10 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 $6,000 of these allocated general overhead costs would be avoided. If management decides to buy Widget A from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?

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Explanation / Answer

Decision making :

If management decides to buy Widget A from the outside supplier rather than continue making the part decrease the annual net income by (96600-93600) = (3000).

Make Buy Direct material 8400 Direct labour 14400 Variable manufacturing overhead 43200 Supervisor's salary 21600 Avoidable allocated overhead 6000 Prchase cost (6000*16.10) 96600 Total 93600 96600

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