Question

An outside supplier has offered to make the part and sell it to the company for $29.80 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 U16 could be used to make more of one of the company's other products, generating an additional segment margin of $25,000 per year for that product. The annual financial advantage (disadvantage) for the company as a result of buying part U16 from the outside supplier should be:

Answer 1

-$79000

Step-by-step explanation:

The computation of the annual financial advantage (disadvantage) is shown below;

Particulars Per unit Total 13000 units

Make Buy Make Buy

Direct materials 2.90 37700

Direct labor 7.50 97500

Variable manufacturing

overhead 8.00 104000

Supervisor's salary 3.40 44200

Contribution margin 25000

Purchase cost 29.80 387400

Total 308400 387400

Now the finacial disadvantage is

= 308400 - 387400

= -$79000