chapter 12

Recher Corporation uses part Q89 in one of products. The company's Accounting Department reports the following costs of producing the 7,800 units of the part that are needed every year. Direct materials Direct labor Variable overhead Supervisor's salary Depreciation of special equipment Allocated general overhead Per Unit $ 6.00 $ 3.30 $ 6.50 $ 2.40 $ 2.00 $ 1.10 An outside supplier has offered to make the part and sell it to the company for $21.00 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 $4,700 of these allocated general overhead costs would be avoided. In addition, the space used to produce part Q89 could be used to make more of one of the company's other products, generating an additional segment margin of $14,300 per year for that product. Required: a. What is the profit/loss of accepting the outside supplier's offer? Profit/loss is b. Should the company make or buy Q89? The company should the part