Norgaard Corporation makes 8,000 units of part G25 each year.This part is used in one of the company's products.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 and sell the part to the company for $21.20 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 $2,000 of these allocated general overhead costs would be avoided.In addition, the space used to produce part G25 would be used to make more of one of the company's other products, generating an additional segment margin of $16,000 per year for that product. The annual financial advantage (disadvantage)for the company as a result of buying part G25 from the outside supplier should be:
A)($8,400)
B)$16,000
C)($8,000)
D)($40,000)

Question

Norgaard Corporation makes 8,000 units of part G25 each year.This part is used in one of the company's products.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 and sell the part to the company for $21.20 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 $2,000 of these allocated general overhead costs would be avoided.In addition, the space used to produce part G25 would be used to make more of one of the company's other products, generating an additional segment margin of $16,000 per year for that product. The annual financial advantage (disadvantage)for the company as a result of buying part G25 from the outside supplier should be:
A)($8,400) 
B)$16,000 
C)($8,000) 
D)($40,000)

Quizplus · Accepted Answer

To find the annual financial advantage/disadvantage of buying part G25 from the outside supplier, we need to compare the total cost of producing 8,000 units internally (current method) with the cost of buying 8,000 units from the outside supplier (proposed method).

Current method:
- Direct materials: $6.80 x 8,000 units = $54,400
- Direct labor: $5.40 x 8,000 units = $43,200
- Variable overhead: $2.00 x 8,000 units = $16,000
- Allocated general overhead: $7.70 x 8,000 units = $61,600
- Total cost = $175,200

Proposed method:
- Purchase cost: $21.20 x 8,000 units = $169,600
- Allocated general overhead saved: $2,000
- Additional segment margin: $16,000
- Total cost = $169,600 - $2,000 + $16,000 = $183,600

Comparing the two methods, we can see that it would be cheaper to produce the part internally ($175,200) than to buy it from the outside supplier ($183,600). Therefore, the annual financial disadvantage for the company as a result of buying part G25 from the outside supplier would be ($8,400). 11ea7998_5c59_f292_911b_d192c32cbe09_TB2627_00_TB2627_00 11ea7998_5c59_f293_911b_19ed9b6e0ce1_TB2627_00_TB2627_00

Norgaard Corporation Makes 8,000 Units of Part G25 Each Year