Question

please make sure the numbers are right

Check Recher Corporation uses part Q89 in one of its products. The company's Accounting Department reports the following costs of producing the 9100 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 $9.80 5.0e 9.99 $ 3.88 3.20 $ 1.70 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 supervisors 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 $3,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part Q89 could be used to make more of one of the company's other products, generating an additional segment margin of $16,700 per year for that product Required: a. Prepare a report that shows the financial impact of buying part Q89 from the supplier rather than continuing to make it inside the company b. Which alternative should the company choose? Complete this question by entering your answers in the tabs below. 30f 5İİİ < Prev Next > rch

Answer 1

Solution

Recher Corporation

1. Determination of the financial impact of buying part Q89 from the supplier rather than continuing to make it inside the company:

Recher Company
Evaluation of the offer to buy 9,100 units of Q89
	Make	Buy
Direct Materials	$81,900
Direct Labor	$45,500
Variable Overhead	$90,090
Supervisor's Salary	$34,580
Depreciation of special equipment	$0
Allocated general overhead	$3,000
Outside purchase price		$273,000
Opportunity cost		($16,700)
Total Cost	$255,070	$256,300

Notes:

The evaluation of the offer to buy 9,100 units of Q89 takes into account only those costs that are avoidable when Q89 is purchased from outside supplier. Also, the opportunity cost (benefit from using the space to make other products) is also relevant for the decision.

The depreciation on equipment is a sunk cost and not relevant.

Of the total allocated cost, only $3,000 is avoidable when the product is purchased from supplier, hence $3,000 is relevant and other portion of allocated general is irrelevant as the cost continues regardless of the decision to make or buy.

2. The company should choose to continue to MAKE Q89 as the cost to make, $255,070 is less compared to the cost to BUY, $256,300. The company saves $1,230 (256,300 – 255,070) by choosing to MAKE Q89 instead of buying it from outside supplier at $30 per unit.

Hence, the decision is to MAKE.