An outside supplier has offered to make and sell the part to the company for $24.10 each. If this offer is accepted, the supervisor's salary and all of the variable costs 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. If management decides to buy part Z95 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income

Question

Business

Lorena Sampson

8 December, 16:38

An outside supplier has offered to make and sell the part to the company for $24.10 each. If this offer is accepted, the supervisor's salary and all of the variable costs 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. If management decides to buy part Z95 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income

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Bethany Melton · Answer 1

Net operating income would decrease by $36,000 per year.

Explanation:

The company's current cost of manufacturing a part Z95 is $33.9 which includes all the material, labor and overhead costs. If the company buys this part from an outside supplier it will cost $24.10 each. but the depreciation and factory overhead cannot be avoided. The depreciation is $5.40 and factory overheads are $8.60. This will be added to the cost of buying each part.

$24.10 + $5.40 + $8.60 = $38.1

The cost of buying the part is greater than the cost of making it.