X Question 11. Part A 42 is used by Elgin Corporation to make one of its product
ID: 2599874 • Letter: X
Question
X Question 11. Part A 42 is used by Elgin Corporation to make one of its products. A total of 16,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity Direct labor. Variable manufacturing overhead. $5.50 Supervisor's salary Depreciation of special equipment $8.00 Allocated general overhead....$5.30 Per Unit $8.90 ....$5.60 An outside supplier has offered to make the part and sell it to the company for $30.40 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the 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 none of which would be 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 ovcrall 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. E. None of the above 12. Ellyn Co. specializes in two products: records and cassettes. The company recorded a net operating income last year of $40.000, and provided the following information from last year using its products as segments Product Records Cassettes Sales variable expense as a percentage of sales Segment margin $300,000 80% $30,000 S500,000 60% What were the total fixed expenses for Ellyn Co. last year? A. $50,000 B. $200,000 C. $180,000 D. $220,000 $150,000Explanation / Answer
11.
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 A.
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