An outside supplier has offered to produce and sell the part to the company for $23.40 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, none of which would be avoided if the part were purchased instead of produced internally. In addition to the facts given above, assume that the space used to produce part U98 could be used to make more of one of the company's other products, generating an additional segment margin of $18,800 per year for that product. What would be the financial advantage (disadvantage) of buying part U98 from the outside supplier and using the freed space to make more of the other product?

Question

Olive

Business

10 May, 06:55

An outside supplier has offered to produce and sell the part to the company for $23.40 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, none of which would be avoided if the part were purchased instead of produced internally. In addition to the facts given above, assume that the space used to produce part U98 could be used to make more of one of the company's other products, generating an additional segment margin of $18,800 per year for that product. What would be the financial advantage (disadvantage) of buying part U98 from the outside supplier and using the freed space to make more of the other product?

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Scarlet Manning · Answer 1

It will be a financing advantage for 18,800 It should accept the offer

Missing Information

Kleffman Corporation is presently making part X31 that is used in one of its products. A total of 2,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:

DM $6.90

DL $4.90

V MO $8.00

Supervisor $2.20

Depreciation $1.40

general $2.80

total cost $ 26.20

Explanation:

We will face unavoidable cost for:

$2.80 x 2,000 units = $5,600

The depreciation should be considered sunk cost as financially it do not repreent any cash flow for the company.

Make cost: 2,000 units x $26.20 = $ 52,400

opportunity cost:

additional segment margin $ 18,800

Total cost $ 71,200

Purchase cost: $ 23.40 x 2,000 = $ 46,800

unavoidable cost: $ 5,600

Total cost $ 52,400

Differential: 71,200 - 52,400 = 18,800