Part U67 Is Used in One of Broce Corporation's Products

question 12

Essay

Part U67 is used in one of Broce Corporation's products. The company's Accounting Department reports the following costs of producing the 7,000 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 $21.40 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 $6,000 of these allocated general overhead costs would be avoided.Required:a. Prepare a report that shows the financial impact of buying part U67 from the supplier rather than continuing to make it inside the company.b. Which alternative should the company choose?

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Definitions:

Total Lead Time

The cumulative time required for a product to complete all stages of production, from initiation to final delivery.

Long Setups

The extended time period required to prepare or configure machinery and equipment for a specific production task.

Large Batch Sizes

This term refers to the production of goods in large quantities at a time, often to achieve economies of scale but possibly increasing holding costs.

Smaller Inventories

Holding reduced levels of stocks or goods to lower storage costs and minimize risk of obsolescence.