Question

Ifshin Corporation makes 8,000 units of part I25 each year for use in production. The Accounting Department reports the following costs of producing the part at this level of activity: Per Unit Total Direct materials $ 6.70 Direct labor $ 8.10 Variable manufacturing overhead $ 1.10 Supervisor's salary $ 2.00 $16,000 Depreciation of special equipment $ 4.20 $33,600 General overhead $ 2.10 $16,800 An outside supplier has offered to sell the part to the company for $21.20 each. If this offer is accepted, the supervisor's salary and all of the variable costs can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. If the outside supplier's offer were accepted, only $8,000 of general overhead costs would be avoided. In addition, the space used to produce part I25 would be used to make more of one of the company's other products, generating an additional margin of $16,000 per year. What is the annual financial advantage (disadvantage) for the company as a result of buying part I25 from the outside supplier?

Answer 1

Computation of Financial Advantage / (Diadvantage)- Ifshin Corporation
	Make	Buy	Net Income increase / ( Decrease) by Bying
Direct Material	$53,600
Direct Labour	$64,800
Variable Manufacturign Overhead	$8,800
Supervisor Salary	$16,000
Depreciation on Special Equipment	$33,600	$33,600
Allocated General Overhead	$16,800	$8,800
Buying Cost		$169,600
Less: Additional Segment Margin		-$16,000
Tototal Annual Cost	$193,600	$196,000	-$2,400
Financial Disadvantage will be :- $2400 as result og buying 125 from outside Supplier