Part N29 is used by Farman Corporation to make one of its products. A total of 11,000
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Direct Materials...............................................$5.90
Direct Labor....................................................$1.70
Variable manufacturing overhead...................$5.40
Supervisor's salary...........................................$2.60
Depreciation of special equipment..................$3.20
Allocated general overhead............................$3.30
An outside supplier has offered to make the part and sell it to the company for $21.20 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 N29 could be used to make more of one of the company's other products, generating an additional segment margin of $29,000 per year for that product.
What would be the impact on the company's overall net operating income of buying part N29 from the outside supplier?
a) Net operating income decline by $38,900
b) Net operating income increase by $29,000
c) Net operating income decrease by $32,600
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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Managerial Accounting
ISBN: 978-0697789938
13th Edition
Authors: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer
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