Question

Recher Corporation uses part Q89 in one of its products. The company's Accounting Department reports the following costs of producing the 9,900 units of the part that are needed every year.

	Per Unit
Direct materials	$	6.30
Direct labor	$	3.50
Variable overhead	$	6.90
Supervisor's salary	$	2.60
Depreciation of special equipment	$	2.20
Allocated general overhead	$	1.20

An outside supplier has offered to make the part and sell it to the company for $22.00 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 $4,000 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 $16,200 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?

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.

	Make	Buy
Direct materials
Direct labor
Variable overhead
Supervisor's salary
Depreciation of special equipment
Allocated general overhead
Outside purchase price
Opportunity cost
Total cost

Required B

Which alternative should the company choose?

The total cost of the "make" alternative is

by

Therefore, the company should

the part.

the total cost of the "make" alternative is ____ by_____ therefore, the company shoiuld _____ the part

Answer 1

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.

	Make Buy Direct materials (9900*6.3) 62370 Direct labor 34650 Variable overhead 68310 Supervisor's salary 25740 Depreciation of special equipment 21780 21780 Allocated general overhead 11880 7880 Outside purchase price 217800 Opportunity cost 16200 Total cost 240930 247460

Required B

Which alternative should the company choose?

	The total cost of the "make" alternative is Decrease by $6530 Therefore, the company should Make the part.