Asked by elandra dabney on May 14, 2024
Verified
Recher Corporation uses part Q89 in one of its products. The company's Accounting Department reports the following costs of producing the 8,300 units of the part that are needed every year.
An outside supplier has offered to make the part and sell it to the company for $30.00 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 $4,500 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 $17,000 per year for that product.Required:a. Prepare a report that shows the financial impact of buying part Q89 from the supplier rather than continuing to make it inside the company.b. Which alternative should the company choose?
Special Equipment
Devices or machinery tailored for specific tasks or operations that are not part of the standard manufacturing process.
Allocated General Overhead
The distribution of indirect costs to specific products or business segments based on a formula or allocation base.
Variable Costs
Costs that change in proportion to the level of production or sales, such as raw materials and direct labor.
- Investigate the cost-effectiveness of continuing current production efforts as opposed to engaging in outsourcing.
- Evaluate the pertinence of costs and gains in decisions related to make-or-buy and special orders.
Verified Answer
b.The total cost of the make alternative is lower by ${{[a(19)]:#,###}}. Therefore, the company should continue to make the part itself.
Learning Objectives
- Investigate the cost-effectiveness of continuing current production efforts as opposed to engaging in outsourcing.
- Evaluate the pertinence of costs and gains in decisions related to make-or-buy and special orders.
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