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:

Table Paper

Disposable paper used to cover examination tables in medical settings for hygiene purposes.

Dowel

A cylindrical rod, usually made of wood, metal, or plastic, used to reinforce joints or support shelves and other structures.

Fasting Process

The act of willingly abstaining from some or all food, drink, or both, for a period of time, often used for health, religious, or medical purposes.

Midnight

The middle of the night, specifically the transition time from one day to the next at 00:00 hours.