Question

Part U67 is used in one of Broce Corporation's products. The company's Accounting Department reports the following costs of producing the 15,300 units of the part that are needed every year. Direct materials Direct labor Variable overhead Supervisor's salary Depreciation of special equipment Allocated general overhead Per Unit $ 2.20 $ 3.20 $ 6.00 $ 6.50 $ 7.60 $ 4.70 An outside supplier has offered to make the part and sell it to the company for $25.00 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 $21,300 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 b. Which alternative should the company choose? < Prev 2 of 5 Next >

hi, can you please show me how to work these out and show me the correct answers. thanks so much and have a great day

Answer 1

A) Fixed costs which are unavoidable as they would be incurred even if the product is bought from outside suppliers and so shall not be considered as relevant cost for deciding whether to make or buy the products. However, those fixed costs which are specifically incurred for manufacturing particular product being analyzed, shall be taken into account while evaluating whether to make or buy from supplier. That is, Allocated fixed mfg. overhead and dep. on special equipment, etc. are irrelevant and should not be considered as they would be incurred whether units are produced in the factory or bought from supplier. If certain fixed costs can be avoided by buying goods from outside supplier, such avoidable fixed costs shall be taken into account on the evaluation. Make $33,660 $48,960 $91,800 $99,450 Direct materials Direct labour Variable overhead Supervisor's salary Depreciation of special equipment Allocated general overhad Outside purchase price Total relevant costs Buy $0 (15,300 units x $2.20] $0 (15,300 units x $3.20] $0 [15,300 units x $6.00] $0 [15,300 units x $6.50] $0 [Cannot be avoided & so ignored] $0 [Avoidable fixed costs & so considered] $382,500 (15,300 units x $25] $382,500 $0 $21,300 SO 502 $295,170 B) Financial disadvantage of accepting the outside supplier's offer -$87,330 [$295170 - $382500] The total cost of the 'make' alternative is LOWER by $87330. Therefore, the company should MAKE the part.