Asked by Morghan Graper on Jul 29, 2024
Verified
In addition to the facts given above, assume that the space used to produce part Z43 could be used to make more of one of the company's other products, generating an additional segment margin of $24,000 per year for that product.What would be the annual financial advantage (disadvantage) of buying part Z43 from the outside supplier and using the freed space to make more of the other product?
A) ($10,500)
B) ($58,500)
C) $24,000
D) $8,500
Segment Margin
The amount of profit or loss generated by one part of a business, after accounting for the direct and indirect costs of that segment.
Financial Advantage
The benefit gained in financial terms, which could be through savings, profits, or reduced costs.
Outside Supplier
An outside supplier is an external entity that provides goods or services to a company, not tied by corporate affiliation.
- Absorb the essence of make-or-buy decisions and their effect on financial profitability.
- Understand the concept of opportunity costs and how they influence decision-making.
Verified Answer
Buying the part rather than making it would decrease total cost by $8,500 per year.Reference: CH11-Ref11
Elly Industries is a multi-product company that currently manufactures 30,000 units of part MR24 each month for use in production of its products.The facilities now being used to produce part MR24 have a fixed monthly cost of $150,000 and a capacity to produce 35,000 units per month.If Elly were to buy part MR24 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40% of their present amount.The variable production costs of Part MR24 are $11 per unit.
Learning Objectives
- Absorb the essence of make-or-buy decisions and their effect on financial profitability.
- Understand the concept of opportunity costs and how they influence decision-making.
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