Part U16 is used by Mcvean Corporation to make one of its products. A total of 13,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to make the part and sell it to the company for $29.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the 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, none of which would be avoided if the part were purchased instead of produced internally. In addition, the space used to make part U16 could be used to make more of one of the company's other products, generating an additional segment margin of $25,000 per year for that product. The annual financial advantage (disadvantage) for the company as a result of buying part U16 from the outside supplier should be:
A) $25,000
B) ($79,000)
C) ($35,400)
D) $14,600

Question

Part U16 is used by Mcvean Corporation to make one of its products. A total of 13,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:  An outside supplier has offered to make the part and sell it to the company for $29.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the 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, none of which would be avoided if the part were purchased instead of produced internally. In addition, the space used to make part U16 could be used to make more of one of the company's other products, generating an additional segment margin of $25,000 per year for that product. The annual financial advantage (disadvantage) for the company as a result of buying part U16 from the outside supplier should be:
A) $25,000 
B) ($79,000) 
C) ($35,400) 
D) $14,600

Quizplus · Accepted Answer

To determine the annual financial advantage (disadvantage) of buying part U16 from the outside supplier, we must calculate the current cost of producing the part and compare it to the cost of purchasing it.

Current cost of producing 13,000 units of part U16:
Direct materials = $4.60 x 13,000 = $59,800
Direct labor = $9.90 x 13,000 = $128,700
Variable overhead = $3.10 x 13,000 = $40,300
Allocated general overhead = $14.00 x 13,000 = $182,000
Supervisor's salary = $45,000
Total cost = $455,800

Cost of purchasing 13,000 units of part U16:
Price per unit = $29.80
Total cost = $386,400

Annual financial advantage (disadvantage) of buying part U16 from outside supplier:
Total cost of producing internally - Total cost of purchasing from outside supplier + Additional segment margin
$455,800 - $386,400 + $25,000 = $94,400
Therefore, the company would have a financial disadvantage of $94,400 if they were to purchase part U16 from the outside supplier. However, if they were to use the space to make more of a profitable product generating an additional segment margin of $25,000, then the net financial disadvantage would be $79,400. Therefore, the best choice is B, ($79,000).

Part U16 Is Used by Mcvean Corporation to Make One