Question
Part A42 is used by Elgin Corporation to make one of its products. A total of 21,500 units of this part are produced and used
Part A42 is used by Elgin Corporation to make one of its products. A total of 21,500 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:
Per UnitDirect materials$8.60Direct labor$10.00Variable manufacturing overhead$6.60Supervisor's salary$6.70Depreciation of special equipment$9.10Allocated general overhead$6.40
An outside supplier has offered to make the part and sell it to the company for $34.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the 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, the space used to make part A42 could be used to make more of one of the company's other products, generating an additional segment margin of $28,500 per year for that product. What would be the impact on the company's overall net operating income of buying part A42 from the outside supplier?
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