Part U16 Is Used by Mcvean Corporation to Make One

question 57

Multiple Choice

Part U16 is used by Mcvean Corporation to make one of its products. A total of 13,000 units of this part are produced and used every year. 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 the part and sell it to the company for $29.80 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 U16 could be used to make more of one of the company's other products, generating an additional segment margin of $25,000 per year for that product. The annual financial advantage (disadvantage) for the company as a result of buying part U16 from the outside supplier should be:

• A) $25,000
• B) ($79,000)
• C) ($35,400)
• D) $14,600

Understand how inventory accounting affects financial ratios and profit margins under different market conditions.

Grasp the accounting principles and concepts justifying inventory valuation methods, including conservatism and the lower of cost or market rule.

Evaluate the financial impact of LIFO liquidations on net income and tax obligations.

Recognize the need for adjustments in financial analysis due to holding gains or losses.

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Definitions:

Infants

Very young children, especially those under one year of age.

Strange Situation

Laboratory technique used to study infant attachment.

Mother

A female parent or guardian who may share a biological or adoptive bond with a child.

Stranger

An individual who is not known personally to another individual or is not familiar within a specific context or environment.