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:
Multiple Choice
A) ($40,000)
B) $16,000
C) ($8,000)
D) ($8,400)

Answer 1

The annual financial advantage (disadvantage) for the company as a result of buying part G25 from the outside supplier is ($40,000).

Step-by-step explanation:

To determine the annual financial advantage or disadvantage for the company, we need to compare the costs of producing part G25 internally with the cost of buying it from the outside supplier. Let's calculate the total cost of producing part G25 internally:

• Total direct materials cost = Direct materials per unit * Number of units = $6.70 * 8,000 = $53,600
• Total direct labor cost = Direct labor per unit * Number of units = $8.10 * 8,000 = $64,800
• Total variable manufacturing overhead = Variable manufacturing overhead per unit * Number of units = $1.10 * 8,000 = $8,800
• Total supervisor's salary = Supervisor's salary per unit * Number of units = $2.00 * 8,000 = $16,000
• Total depreciation of special equipment = Depreciation per unit * Number of units = $4.20 * 8,000 = $33,600
• Total allocated general overhead = Allocated general overhead per unit * Number of units = $2.10 * 8,000 = $16,800
• Total cost of producing internally = Total direct materials cost + Total direct labor cost + Total variable manufacturing overhead + Total supervisor's salary + Total depreciation of special equipment + Total allocated general overhead = $53,600 + $64,800 + $8,800 + $16,000 + $33,600 + $16,800 = $193,600

Now let's calculate the total cost of buying part G25 from the outside supplier:

• Total cost of buying externally = Cost per unit from the supplier * Number of units = $21.20 * 8,000 = $169,600
• Additional segment margin generated = $16,000
• Total financial advantage or disadvantage = Total cost of producing internally - Total cost of buying externally + Additional segment margin generated = $193,600 - $169,600 + $16,000 = $40,000

Therefore, the annual financial advantage (disadvantage) for the company as a result of buying part G25 from the outside supplier is ($40,000).