Question

art E14 is used by M Corporation to make one of its products. A total of 20,000 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: Per Unit Direct materials $ 4.30 Direct labor $ 8.90 Variable manufacturing overhead $ 9.40 Supervisor's salary $ 4.80 Depreciation of special equipment $ 3.20 Allocated general overhead $ 8.40 An outside supplier has offered to make the part and sell it to the company for $30.30 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 E14 could be used to make more of one of the company's other products, generating an additional segment margin of $32,000 per year for that product. The annual financial advantage (disadvantage) for the company as a result of buying part E14 from the outside supplier should be:

Answer 1

Answer:

It is more profitable to continue making the product. On this level of production, the company saves $26,000 if it makes the product in-house.

Explanation:

Giving the following information:

Units= 20,000

Per Unit Cost:

Direct materials $4.30

Direct labor $8.90

Variable manufacturing overhead $9.40

Supervisor's salary $4.80

An outside supplier has offered to make the part and sell it to the company for $30.30 each.

Rent space= $32,000 per year

We will take into account only the differential costs.

Make in-house:

Total cost= 20,000* (4.3 + 8.9 + 9.4 + 4.8)= $548,000

Buy:

Total cost= 20,000*30.3 - 32,000= $574,000

It is more profitable to continue making the product. On this level of production, the company saves $26,000 if it makes the product in-house.