Question 23 Walsh Corporation is presently making part U98 t

Question 23 Walsh Corporation is presently making part U98 that is used in one of its products. A total of 7,000 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: Not yet answered Points out of 4 PFlag Per Unit $3.70 $3.60 $1.40 $4.00 $ 3.90 $ 4.10 question Direct materials Direct labor Variable overhead Supervisor\'s salary Depreciation of special equipment Allocated general overhead An outside supplier has offered to produce and sell the part to the company for $17.10 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 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 to the facts given above, assume that the space used to produce part U98 could be used to make more of one of the company\'s other products, generating an additional segment margin of $24,000

Solution

Step 1:- Calculation of total cost for 7,000 units if produced internally

Particulars Cost per unit

1. Direct materials $3.70

2. Direct labour $3.60

3. Variable overhead $1.40

4. Supervisor\'s salary $4.00

5. Total variable cost $12.70

Total cost for 7,000 units = $88,900.00 (7,000 * $12.70)

Note :

a) Depreciation of special equipment is irrelevant for decision making because it is an historical cost.

b) Allocated general overhead is irrelevant for decision making because it is common cost of the company. So, we are going to incur this cost whether we are producing internally or purchasing from an outsider.

Step 2:- Calculation of total cost for 7,000 units if buying from outsider

Particulars Cost

1. Purchase cost (7,000 * $17.10) $119,700.00

2. Less : Additional margin generated ($24,000.00)

for producing other product

3. Total purchase cost $95,700.00

Step 3:- Calculation of financial advantage(disadvantage) of buying part U98 from the outsider

Particulars. Amount

1. Total cost if produced internally. $88,900.00

2. Total cost if purchased from outsider. $95,700.00

3. Advantage/(disadvantage) (1-2) ($6,800.00)

By comparing the above two costs the total disadvantage of buying a part from outsider is ($6,800.00)

So option to this question is \"b\"