Recher Corporation Uses Part Q89 in One of Its Products

question 128

Essay

Recher Corporation uses part Q89 in one of its products. The company's Accounting Department reports the following costs of producing the 8,000 units of the part that are needed every year.
An outside supplier has offered to make the part and sell it to the company for $27.60 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 $3,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part Q89 could 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.
Required:
a. Prepare a report that shows the financial impact of buying part Q89 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?

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Definitions:

Factorial Design

A statistical method in experiments involving two or more independent variables, allowing researchers to evaluate their interaction effects.

Correlational Approach

A research method used to determine the relationship between two variables without inferring a cause-and-effect relationship.

Social Psychology

A branch of psychology that examines how people's thoughts, feelings, and behaviors are influenced by the actual, imagined, or implied presence of others.

Social Psychology

Research into the methods individuals use to think about, impact, and establish relationships in social environments.