4) Part A42 is used by Elgin Co rporation to make one of its products. A total o

Question

4) Part A42 is used by Elgin Co rporation to make one of its products. A total of 16,000 4 units of this part are produced and used every year. The company'sAccounting Department reports the following costs of producing the part at this level of activity: Per Unit Direct materials Direct labor Variable manufacturing overhead Supervisor's salary Depreciation of special equipment $8.00 Allocated general overhead $7.50 $8.90 $5.50 $5.60 $5.30 An outside supplier has offered to make the part and sell it to the company for $30.40 including the direct labor, can be avoided. The special equipment used to make the part general overhead represents fixed costs of the entire company, none of which would be each. If this offer is accepted, the supervisor's salary and all of the variable costs, was purchased many years ago and has no salvage value or other use. The allocated avoided if the part were purchased instead of produced internally. In addition, the space used to make part A42 could be used to make more of one of the company's other products, generating an additional segment margin of $23,000 per year for that product. What would be the impact on the company's overall net operating income of buying part A42 from the outside supplier? A) Net operating income would decrease by $23,400 per year. B) Net operating income would decrease by $143,400 per year C) Net operating income would increase by $23,000 per year. D) Net operating income would decrease by $189,400 per year.

Explanation / Answer

Make Buy Net income increase (decrease) Direct materials (16000*7.5) 120000 120000 direct labor (16000*8.90) 142400 142400 VMOH (16000*5.5) 88000 88000 Supervisory salar (16000*5.6) 89600 89600 cost of buying (16000*30.40) 486400 -486,400 segment margin -23,000 23,000 total 440000 463400 -23400 option A) Net operating income would decrease by $23,400 per year

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