Question

Masse Corporation uses part G18 in one of its products.

Answer 1

Answer:

Masse Corporation

1. The effect on the company's total net operating income of buying part G18 from the supplier rather than continuing to make it inside the company is an additional cost of $47,100.

2. Masse Corporation should continue to produce the part in-house.  The "Make" alternative is better.

Explanation:

a) Data and Calculations:

Units of part G18 needed yearly = 17,100

Costs of production:

Direct materials      $4.30

Direct labor              5.00

Variable overhead  8.00

Supervisor's salary 8.70

Total variable costs= $26 * 17,100 = $444,600

Avoidable general overhead cost =    $23,100

Total avoidable costs =                      $467,100

Outside supplier's offered price for the part = $32 each

Total cost for the outside supply = $547,200 ($32 * 17,100)

Unavoidable fixed costs:

Depreciation of special equipment 9.30

Allocated general overhead 6.30 * 17,100 = $107,730

Unavoidable cost = $84,630 ($107,730 - $23,100)

b) The effect on the company's total net operating income of buying part G18 from the supplier rather than continuing to make it inside the company is an additional cost of $47,100 ($547,200 - $467,100 - $33,000).