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Prepare a report that shows the financial impact of buying this part from the supplier rather than continuing to make it inside the company. Which alternative should the company choose?

Prepare a report that shows the financial impact of buying this part from the supplier rather than continuing to make it inside the company. Which alternative should the company choose?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Kirsten Corporation makes 8,000 units per year of a part called a Q89 gasket for use in one of its products. Data concerning the unit production costs of the Q89 gasket follow: Direct materials $ 7.30 Direct labor 4.00 Variable manufacturing overhead 7.80 Allocated general overhead 1.20 Supervisor's salary 2.90 Depreciation of special equipment 2.40 An outside supplier has offered to make the part and sell it to the company for $25.50 each. If the 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 $4,100 these allocated general overhead costs would be avoided. In addition, the space used to produce this part could be used to make more of one of the company's other products, generating an additional segment margin of $14,800 per year for that product. Required: Prepare a report that shows the financial impact of buying this part from the supplier rather than continuing to make it inside the company. Which alternative should the company choose?
Transcribed Image Text:Kirsten Corporation makes 8,000 units per year of a part called a Q89 gasket for use in one of its products. Data concerning the unit production costs of the Q89 gasket follow: Direct materials $ 7.30 Direct labor 4.00 Variable manufacturing overhead 7.80 Allocated general overhead 1.20 Supervisor's salary 2.90 Depreciation of special equipment 2.40 An outside supplier has offered to make the part and sell it to the company for $25.50 each. If the 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 $4,100 these allocated general overhead costs would be avoided. In addition, the space used to produce this part could be used to make more of one of the company's other products, generating an additional segment margin of $14,800 per year for that product. Required: Prepare a report that shows the financial impact of buying this part from the supplier rather than continuing to make it inside the company. Which alternative should the company choose?
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