Question

n outside supplier has offered to produce this Item and sell it to the company for $15.80 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 Item 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 $26,000 of these allocated general overhead costs would be avoided. If management decides to buy Item I51 from the outside supplier rather than to continue making the Item, what would be the annual impact on the company's overall net operating income

Answer 1

- $119,800(declines).

(Kindly note the negative sign).

Step-by-step explanation:

So, we have the following parameters or data ir information that is going to help us in solving this particular Question or problem;

(1). ..."produce this Item and sell it to the company for $15.80 each."

(2). "The special equipment used to make the Item was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company."

(3). "If the outside supplier's offer were accepted, only $26,000 of these allocated general overhead costs would be avoided".

The relevant cost for Direct Material = 21,600.

The relevant cost for direct labour = 39,600.

The relevant cost for Variable manufacturing overhead = 59,400.

The relevant cost for Supervisor’s salary = 18,000.

Therefore, the total for ''Buy'' = $284,400.

Also, the total for net changes in operating income= - $284,400.

This give us the net changes in operating income to decline $199,800(that is - $119,800).

CALCULATION THAT GIVES THE VALUE FOR THE NET CHANGES IN OPERATING INCOME =

(-) [ {18,000 × 15.80 } - { (1.2 + 2.2 + 3.3 + 1) × 18,000 units} - 26,000 ]