Question

Part T7800 is used in one of Dooley Corporation's products. The company makes 5,000 units of this part each year. The company's Accounting Department reports the following costs of producing the part at this level of activity: $1.00 per unit Direct materials $2.00 per unit Direct labor $6.00 per unit Variable mfg overhead $3.00 per unit Supervisor's salary $9.00 per unit Depreciation of special equipment $4.00 per unit Allocated general overhead An outside supplier has offered to produce this part and sell it to the company for $14.00 each. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The supervisor is only responsible for producing part T7800. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $1 per unit of these allocated general overhead costs would be avoided. If management decides to buy part T7800 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income? Net operating income would decrease by $70,000 per year Net operating income would decrease by $10,000 per year Net operating income would decrease by $25,000 per year Net operating income would decrease by $5,000 per year

Answer 1

Per Unit 14 5000 units Make Buy 70000 i Cost of Purchase @14 cost of Making Direct Material Direct Labour Variable Manuafacturing Cost Supervisor's Salary Fixed Manufacturing Cost Total Cost 2 6 3 4 5000 10000 30000 15000 20000 80000 15000 85000 Incremental Loss on buy 5000 Answer : Net Operating Income Would decrease by $5,000 PerYear