Question

Part U67 is used in one of Broce Corporation's products. The company's Accounting Department reports the following costs of producing the 14,900 units of the part that are needed every year.Per Unit Direct materials $ 1.80Direct labor $ 2.80Variable overhead $ 5.60Supervisor's salary $ 6.10Depreciation of special equipment $ 7.20Allocated general overhead $ 4.30An outside supplier has offered to make the part and sell it to the company for $22.00 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 $20,900 of these allocated general overhead costs would be avoided.Required:a. Prepare a report that shows the financial impact of buying part U67 from the supplier rather than continuing to make it inside the company.b. Which alternative should the company choose?Prepare a report that shows the financial impact of buying part U67 from the supplier rather than continuing to make it inside the company.

Answer 1

Answer:

a)

Production costs for part U67:

Direct materials $1.80 x 14,900 units = $26,820

Direct labor $2.80 x 14,900 units = $41,720

Variable overhead $5.60 x 14,900 units = $83,440

Supervisor's salary $6.10 x 14,900 units = $90,890

Depreciation of special equipment $7.20 x 14,900 units = $107,280

Allocated general overhead $4.30 x 14,900 units = $64,070

total production costs = $414,220

cost of purchasing the units from outside supplier:

14,900 units x $22 purchase price = $327,800

unavoidable fixed costs = $107,280 + ($64,070 - $20,900) = $150,450

total costs associated to purchasing units = $478,250

Financial disadvantage of purchasing the part from outside supplier instead of producing it = $414,220 - $478,250 = ($64,030)

b)

the company should continue to produce part U67 since the relevant costs associated to purchasing it from an outside vendor would result in a financial disadvantage for the company.