Question

#16

Part U16 is used by Mcvean Corporation to make one of its products. A total of 13,000 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 Unit
Direct materials	$	2.90
Direct labor	$	7.50
Variable manufacturing overhead	$	8.00
Supervisor's salary	$	3.40
Depreciation of special equipment	$	1.80
Allocated general overhead	$	7.00

An outside supplier has offered to make the part and sell it to the company for $29.80 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 U16 could be used to make more of one of the company's other products, generating an additional segment margin of $25,000 per year for that product. The annual financial advantage (disadvantage) for the company as a result of buying part U16 from the outside supplier should be:

Multiple Choice

$25,000

$14,600

($35,400)

($79,000)

#17

One of the employees of Davenport Corporation recently was involved in an accident with one of the corporation's delivery vans. The corporation is either going to repair the damaged van or sell it as is and buy a comparable used van. Information related to this decision is provided below:

Initial cost of the damaged van	$	30,000
Accumulated depreciation to date on van	$	18,000
Salvage value of van immediately before crash	$	9,000
Salvage value of van immediately after crash	$	1,000
Cost to repair damaged van	$	5,000
Cost of a comparable used van	$	10,000

Based on the information above, Davenport would be financially better off:

Multiple Choice

$2,000 by buying the comparable van.

$2,000 by repairing the damaged van.

$4,000 by repairing the damaged van.

$1,000 by buying the comparable van.

Answer 1

16. net loss will be $ 70,000

Explanation:

Particulars	Amount ($)
cost of buying part (13000* $ 29.80)	387400
Less:
Avoidable expenses (2.90+7.50+8+3.40)*13000	283400
Loss on buying from outside	104000
Less:
Additional segment margin	25000
Net Loss	79000

17. $ 4000 by repairing the damaged van

Explanation:

Particulars	Amount ($)
Cost of a comparable used Van	10000
Less: Salvage value after crash	1000
Net cost to the company (A)	9000
Cost of repair of Van (B)	5000
saving in terms of repair of van (A-B)	4000