Question

TB Problem Qu. 12-182 Part U67 is used in one of Broce Corporation's ...

Part U67 is used in one of Broce Corporation's products. The company's Accounting Department reports the following costs of producing the 14,900 units of the part that are needed every year.

	Per Unit
Direct materials	$	1.80
Direct labor	$	2.80
Variable overhead	$	5.60
Supervisor's salary	$	6.10
Depreciation of special equipment	$	7.20
Allocated general overhead	$	4.30

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 $20,900 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?

Answer 1

Solution:

Financial impact of buying part U67 from the supplier rather than continuing to make it inside the company:

	Calculation	Make	Buy
Direct materials	1.8*14,900	26,820
Direct labor	2.8*14,900	41,720
Variable overhead	5.6*14,900	83,440
Supervisor's salary	6.1*14,900	90,890
Depreciation of special equipment	No salvage value	0
Allocated general overhead	Given	20,900
Outside purchase price		0	327,800
Total		263,770	327,800

b) As Buying cost Exceeds the making cost by $64,030 it is advantageous to Make the part rather than buying.