Norgaard Corporation Makes 8,000 Units of Part G25 Each Year

question 35

Multiple Choice

Norgaard Corporation makes 8,000 units of part G25 each year. This part is used in one of the company's products. 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 and sell the part to the company for $21.20 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 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 $2,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part G25 would be used to make more of one of the company's other products, generating an additional segment margin of $16,000 per year for that product.
The annual financial advantage (disadvantage) for the company as a result of buying part G25 from the outside supplier should be:

• A) ($8,400)
• B) $16,000
• C) ($8,000)
• D) ($40,000)

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Definitions:

General Nature

A broad term that describes the fundamental characteristics or qualities inherent in something or someone.

Improvements

Changes or modifications made to something to enhance its effectiveness, quality, or performance.

Self-efficacy

An individual’s belief in their own capability to execute behaviors necessary to produce specific performance attainments.

Motivation

The psychological process that initiates, guides, and maintains goal-oriented behaviors, often stemming from internal and external factors.