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 need to calculate the cost of producing it internally and compare it to the cost of buying it from the outside supplier.

Internal cost:
Direct materials: $4.50 x 13,000 = $58,500
Direct labor: $6.50 x 13,000 = $84,500
Variable overhead: $3.00 x 13,000 = $39,000
Supervisor's salary: $21,000
Allocated general overhead: $53,000
Total internal cost: $256,000

External cost:
$29.80 x 13,000 = $387,400

Annual financial advantage (disadvantage):
Total cost of producing internally - Total cost of buying from outside supplier
= $256,000 - $387,400
= ($131,400)

This means that the company would save $131,400 per year by buying the part from the outside supplier, resulting in a financial disadvantage of ($131,400). However, the company would also generate an additional segment margin of $25,000 per year by using the space to make more of one of its other products. Therefore, the net annual financial advantage (disadvantage) would be:

Financial disadvantage + Additional segment margin
= ($131,400) + $25,000
= ($106,400)

This shows that the company would be better off financially by buying the part from the outside supplier, with a net annual financial disadvantage of ($106,400). Therefore, the best choice is option B. 11ea7998_5c5c_63a1_911b_39f7cb1708f8_TB2627_00_TB2627_00 11ea7998_5c5c_63a2_911b_95bd9fc5d5c5_TB2627_00_TB2627_00

Part U16 Is Used by Mcvean Corporation to Make One