Question

Norgaard Corporation makes 8,000 units of part G25 each year. This part is used in one of the company's products. The company's Accounting Department reports the following costs of producing the part at this level of activity: Per Unit Direct materials $ 6.70 Direct labor $ 8.10 Variable manufacturing overhead $ 1.10 Supervisor's salary $ 2.00 Depreciation of special equipment $ 4.20 Allocated general overhead $ 2.10 An outside supplier has offered to make and sell the part to the company for $21.20 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 $2,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part G25 would be used to make more of one of the company's other products, generating an additional segment margin of $16,000 per year for that product. The annual financial advantage (disadvantage) for the company as a result of buying part G25 from the outside supplier should be:

Answer 1

Answer:

$8,400

Explanation:

The computation of the annual financial advantage (disadvantage) for the company is shown below:

Particulars                     Make                             Buy

Direct material           $53,600 (8,000 units × $6.70)

Direct labor                   $64,800 (8,000 units × $8.10)  

Variable manufacturing overhead $8,800  (8,000 units × $1.10)  

Supervisor's salary $16,000  (8,000 units × $2)  

Fixed manufacturing overhead $2,000  

Opportunity cost $16,000  

Purchase cost                                                                $169,600  (8000 × $21.20)

Total relevant cost       $161,200                              $169,600

So, Financial (disadvantage) is

= $161,200 - $169,600

= -$8,400

We simply compared the make and buy cost and as we can see that the cost of buying is more than the cost of making so there is a extra cost i.e to be incurred of $8,400 if out side supplier is chosen