Question

Part S51 is used in one of Haberkorn Corporation's products. The company makes 12,000 units of this part each year. The company's Accounting Department reports the following costs of producing the part at this level of activity: Per Unit $6.30 Direct materials Direct labor $5.70 $4.80 Variable manufacturing overhead Supervisor's salary Depreciation of special equipment Allocated general overhead $7.00 $8.60 $7.20 An outside supplier has offered to produce this part and sell it to the company for $37.70 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 $17,000 of these allocated general overhead costs would be avoided. The annual financial advantage (disadvantage) for the company as a result of buying the part from the outside supplier would be:

Answer 1

Differential analysis

	Make	Buy
Direct material	75600
Direct labor	68400
Variable manufacturing overhead	57600
Supervisor salary	84000
Purchase cost (12000*37.70)		452400
Fixed overhead	17000
Total relevant cost	302600	452400

Financial (disadvantage) = 302600-452400 = -149800