Question

Selma Corporation uses Part PB7 in one of its products. The company's Accounting Department reports the following costs to produce 7,000 units of the PB7 that are needed every year.

	RM per unit
Direct materials	7.00
Direct labour	6.00
Variable overhead	5.60
Supervisors salary	4.70
Depreciation of special equipment	1.50
Allocated general overhead	5.40

An outside supplier has offered to make the part and sell it to the company for RM28.30 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 RM9,000 of these allocated general overhead costs would be avoided.

Required: Should Selma Corporation buy PB7 from the supplier or continue producing the part internally? Shows the effect on the company's total net operating income by comparing both alternatives.

(11 marks)