Question

Part U16 is used by Mcvean Corporation to make one of its products. A total of 19,000 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 $ 4.10 Direct labor $ 8.70 Variable manufacturing overhead $ 9.20 Supervisor's salary $ 4.60 Depreciation of special equipment $ 3.00 Allocated general overhead $ 8.20 An outside supplier has offered to make the part and sell it to the company for $29.50 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 $31,000 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:

A. ($24,100)

B. ($102,000)

C. $31,000

D. ($172,900)

Answer 1

	Per unit		Total 19000 units
	Make	Buy	Make	Buy
Direct materials	4.10		77900
Direct labor	8.70		165300
Variable manufacturing overhead	9.20		174800
Supervisor's salary	4.60		87400
Contribution margin			31000
Purchase cost		29.50		560500
Total			536400	560500
Difference in favor of making = 536400-560500 = $24100
Financial (disadvantage) (24100)
Option A ($24,100) is correct