Question

Part U67 is used in one of Broce Corporation's products. The company's Accounting Department reports the following costs of producing the 15,400 units of the part that are needed every year.

Per Unit
Direct materials $2.30
Direct labor $3.30
Variable overhead $6.10
Supervisor's salary $6.60
Depreciation of special equipment $7.70
Allocated general overhead $4.80

An outside supplier has offered to make the part and sell it to the company for $27.00 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 $21,400 of these allocated general overhead costs would be avoided.

Required:
a. Prepare a report that shows the financial impact of buying part U67 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?

Answer 1

Broce Corporation

a. The Financial Impact of Buying Part U67 is as follows:

Differential Analysis:

Cost of buying from supplier = $415,800 (15,400 * $27)

Avoidable cost of making = 303,220

Differential cost for buying = $112,500

b. The company should choose to continue to produce the part internally.

Step-by-step explanation:

a) Data and Calculations:

Production units for the year = 15,400

Per Unit Costs:

Direct materials $2.30

Direct labor $3.30

Variable overhead $6.10

Total variable costs $11.70

Supervisor's salary $6.60

Depreciation of special equipment $7.70

Allocated general overhead $4.80

Total fixed costs $19.10

Total costs $30.80

Outside supplier's offer per unit = $27

Avoidable costs:

Direct materials $2.30

Direct labor $3.30

Variable overhead $6.10

Supervisor's salary $6.60

Total avoidable variable costs $18.30 * 15,400 = $281,820

General overhead costs 21,400

Total avoidable costs = $303,220

Differential Analysis:

Cost of buying from supplier = $415,800 (15,400 * $27)

Avoidable cost of making = 303,220

Differential cost for buying = $112,500