Question
A company uses part ABC in one of its finished products. The company's accounting department reports the following costs of producing the 8,000 units of
A company uses part ABC in one of its finished products. The company's accounting department reports the following costs of producing the 8,000 units of the part needed each year:
Total $ | |
Direct materials | $64,800 |
Direct labor | $35,200 |
Variable manufacturing overhead | $68,800 |
Salary of "Part ABC" Production Supervisor | $25,600 |
Depreciation of special equipment | $10,400 |
Allocated general overhead, common | $53,000 |
An outside supplier has offered to make the 8,000 parts and sell them to the company for $27.60 each. If this offer is accepted, the supervisor overseeing production of part ABC would be terminated. The special equipment used to make the part was purchased many years ago and has no resale value or alternative use. The allocated (commonly shared) general overhead represents fixed costs of the entire company; if the outside supplier's offer were accepted, $3,000 of these allocated general overhead costs could be eliminated. In addition, the shop space used to produce part ABC could be leased to Norman Co. for $16,000 per year if the space were not being used by the company.
Determine and identify whether the company would be better off or worse off by continuing to make part ABC instead of purchasing it from the outside supplier, and provide the dollar value of difference between the alternatives that supports your conclusion. SHOW ALL WORK, including those cost items that were relevant in your decision and be sure to specifically state whether you are better off or worse off continuing to make part ABC.
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