Question

Recher Corporation uses part Q89 in one of its products. The company's Accounting Department reports the following costs of producing the 7,400 units of the part that are needed every year. Direct materials Direct labor Variable overhead Supervisor's salary Depreciation of special equipment Allocated general overhead Per Unit 7.50 4.20 8.30 3.20 2.70 1.40 An outside supplier has offered to make the part and sell it to the company for $27.00 each. If this offer is accepted, thee 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 $3,400 of these allocated general overhead costs would be avoided. In addition, the space used to produce part Q89 could be used to make more of one of the company's other products, generating an additional segment margin of $18,000 per year for that product.
Required
a. Prepare a report that shows the financial impact of buying part Q89 from the supplier rather than continuing to make it inside the company
b. Which alternative should the company choose?

Answer 1

Answer and Explanation:

The preparation of the financial impact is shown below:

Particulars                                     Make                         Buy

Direct Material (7,400 × $7.50) $55,500  

Direct Labor (7,400 × $4.20) $31,080  

Variable overhead (7,400 × $8.30) $61,420  

Supervisors salary (7,400 × $3.20) $23,680  

Depreciation on special equipment $0                          $0

General overhead                    $3,400  

Purchase cost (7,400 × $27)                               $199,800

Opportunity cost                                               $(18,000)

Total Annual Cost                      $175,080                $181,800

b. As we can see that the total annual making cost is $175,080 and the total annual buying cost is $181,800 which increase the cost by $6,720. So in this case the company should make the product rather than buying them