Question

TB Problem Qu. 12-179 Recher Corporation uses ... Recher Corporation uses part 089 in one of its products. The company's Accounting Department reports the following costs of producing the 8,300 units of the part that are needed every year. Direct materials Direct labor Variable overhead Supervisor salary Depreciation of special equipment Allocated general overhead Per Unit $7.10 $4.00 $7.90 $3.00 $2.60 $1.40 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 $2.800 of these allocated general overhead costs would be avoided. In addition, the space used to produce part 089 could be used to make more of one of the company's other products, generating an additional segment margin of $16,400 per year for that product Required: a. Prepare a report that shows the financial Impact of buying part 089 from the supplier rather than continuing to make It inside the company b. Which alternative should the company choose?

Answer 1

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Opportunity cost either can be added to Column "Make" or deducted from column "Buy", per question: Solution: Make Buy a) Direct Materials (8300 7.10) 58930 Direct Labor Variable Overhead Supervisor's Salary Depreciation of Special Equipment Allocated general overhead Outside purchase price Opportunity Cost (8300 4.00) 33200 (8300*7.90) 65570 (8300*3.00) (sunk cost) 24900 0 (only relevant) 2800 (8300*25) 207500 16400 -16400 Total Cost 201800 207500 Total Cost OR: 185400 191100 $ 5,700 b) The total cost of the "Make" Alternative is by Lower the part. Therefore, the company should Make