Question

Part U67 is used in one of Broce Corporation's products. The company's Accounting Department reports the following costs of producing the 16,500 units of the part that are needed every year.

	Per Unit
Direct materials	$	3.70
Direct labor	$	4.40
Variable overhead	$	7.40
Supervisor's salary	$	8.10
Depreciation of special equipment	$	8.70
Allocated general overhead	$	5.70

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 $22,500 of these allocated general overhead costs would be avoided.

Required:

a. Prepare a report that shows the financial impact of buying part U67 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

Total Cost

b. Which alternative should the company choose?

The total cost of the make alternative is (higher or lower) by ($), therefore the company should (make or buy) the part.

Answer 1