Question

Part O43 is used in one of Scheetz Corporation's products. The company's Accounting Department reports the following costs of producing the 16,200 units of the part that are needed every year.

	Per Unit
Direct materials	$3.10
Direct labor	$4.10
Variable overhead	$6.90
Supervisor's salary	$7.40
Depreciation of special equipment	$8.50
Allocated general overhead	$5.60

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 $22,200 of these allocated general overhead costs would be avoided.

Required:

a. Prepare a report that shows the effect on the company's total net operating income of buying part O43 from the supplier rather than continuing to make it inside the company. (Input the amount as a positive value.)

Answer 1

Differential Analysis
			Make	Buy	Net Income
					Inc/Decrease
Direct Material			50220	0	50220
Direct Labouur			66420	0	66420
Variable overheads'			111780	0	111780
Supervisors salaries			119880	0	119880
Dep on Special Equipment			137700	137700	0
Allocated General Oh			90720	68520	22200
Cost of Purchase			0	486000	-486000
Net decrease in income			576720	692220	-115500
Hence, the Component must be manufactured.