Chap 12 QZ (QUESTION 4)

Part U67 is used in one of Broce Corporation's products. The company's Accounting Department reports the following costs of producing the 15,300 units of the part that are needed every year.

	Per Unit
Direct materials	$	2.20
Direct labor	$	3.20
Variable overhead	$	6.00
Supervisor's salary	$	6.50
Depreciation of special equipment	$	7.60
Allocated general overhead	$	4.70

An outside supplier has offered to make the part and sell it to the company for $25.00 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 $21,300 of these allocated general overhead costs would be avoided.

Required:

a. Prepare a report that shows the financial impact of buying part U67 from the supplier rather than continuing to make it inside the company.

b. Which alternative should the company choose?

Prepare a report that shows the financial impact of buying part U67 from the supplier rather than continuing to make it inside the company.

Required A

	Make	Buy
Direct materials
Direct labor
Variable overhead
Supervisor's salary
Depreciation of special equipment
Allocated general overhead
Outside purchase price
Total cost

Required B

Which alternative should the company choose?

The total cost of the "make" alternative is

lower

by

Therefore, the company should

make

the part.