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A part is used in one of a corporation's products. The company's accountant reports the following costs of producing the 15,000 units of the
A part is used in one of a corporation's products. The company's accountant reports the following costs of producing the 15,000 units of the part that are needed every year. Direct materials Direct labor Variable overhead Supervisor's salary Depreciation of special equipment Per Unit $1.90 $2.90 $5.70 $6.20 57.30 $4.40 Allocated general overhead An outside supplier has offered to make the part and sell it to the company for $23.00 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 $21,000 of these allocated general overhead costs would be avoided. Required: a. Prepare a report that shows the financial impact of buying the part from the supplier rather than continuing to make it inside the company. Not all of these items may be relevant to the decision. If an item is not relevant, leave the amount blank in the column. Use total costs for all units in the table, not per unit numbers. b. Which alternative should the company choose?
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