make one of its products. A total of 16.000 units o actvyncunting Department rep
ID: 2599835 • Letter: M
Question
make one of its products. A total of 16.000 units o actvyncunting Department reports the follo 10. Part A42 is used by Elgin Corporation to part are produced and used every year. The compa costs of producing the part ai this level of activity el of ys Acevumtinducts A total of 16.000 units of this par at this ear. The Per Unit Direct r Direct labor $7.50 8.90 Variable manufacturing overhead. $5.50 $5.60 Depreciation of special equipment. $8.00 Supervisor's salary Allocated general overhead.. $5.30 $30.40 each. If this offer An outside supplier has offered to make the part and sell it to the company for is accepted, the supervisors salary and all of the variable costs, including avoided. The special equipment used to make the part was purchased manY Sosts salvage value or other use. The allocated general overhead represents the direct labor, can be ago and has no none of which would be avoided if the part were purchased instead of produced internally. In other products, would be the outside supplier e space used to make part A42 could be used to make more of one of the cop generating an additional segment margin of $23,000 per year for that product. What wisi impact on the company's overall net operating income of buying part A421 A. Net operating income would decrease by $143,400 per year. B. Net operating income would decrease by $23,400 per year. C. Net operating income would increase by $23.000 per year D. Net operating income would decrease by $189,400 per year E. None of the above.Explanation / Answer
Depreciation of special equipment is a sunk cost and allocated general overhead is an unavoidable cost whether the parts are manufactured internally or purchased from outside supplier. Therefore, these costs are irrelevant in calculation of increase or decrease in net operating income if the part is purchased from outside supplier.
Total cost of purchasing the part = Cost per unit x Number of units purchased = $30.40 x 16,000 = $486,400
However, if the part is purchased from outside supplier, additional segment margin of $23,000 per year can be generated by producing other products.
Therefore,
Net cost of purchasing the part = $486,400 - $23,000 = $463,400
Now,
Total cost that can be avoided if the part is purchased from outside supplier
= Avoidable cost per unit x Number of units purchased
= ($7.50 + $8.90 + $5.50 + $5.60) x 16,000
= $440,000
The cost of purchasing the part from outside supplier is $463,400. Whereas, the cost that can be avoided by purchasing the part is only $440,000. Therefore, if the company purchases the part from outside supplier its net operating income will decrease.
Decrease in net operating income = $463,400 - $440,000 = $23,400
Thus,
The correct answer is B.
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