Question

An outside supplier has offered to make the part and sell it to the company for $25.10 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 $25,500 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

Missing information:

Corporation makes 5,700 units of part U13 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 $9.60 Direct labor $7.80 Variable manufacturing overhead $10.20 Supervisor's salary $5.90 Depreciation of special equipment $8.80 Allocated general overhead $8.00 An outside supplier has offered to make and sell the part to the company for $25.10 each.

Answer:

annual financial advantage of purchasing part from outside vendor = $73,380  

Explanation:

current production costs per unit:

• direct materials $9.60
• direct labor $7.80
• variable manufacturing overhead $10.20
• supervisor's salary $5.90
• depreciation of special equipment $8.80
• allocated general overhead (fixed) $8.00
• total current costs per unit = $50.30
• total costs $50.30 x 5,700 units = $286,710

costs if company decides to purchase the part form outside vendor:

• purchase cost per unit $25.10
• deprecation of special equipment $8.80
• allocated general overhead $8.00
• total costs per unit = $41.90
• total costs $41.90 x 5,700 = $238,830
• - revenue generated from using facility space = $238,830 - $25,500 = $213,330

annual financial advantage of purchasing part from outside vendor = $286,710 - $213,330 = $73,380