Mcfarlain Corporation Is Presently Making Part U98 That Is Used

question 173

Multiple Choice

Mcfarlain Corporation is presently making part U98 that is used in one of its products. A total of 14,000 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 produce and sell the part to the company for $26.70 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, none of which would be avoided if the part were purchased instead of produced internally.In addition to the facts given above, assume that the space used to produce part U98 could be used to make more of one of the company's other products, generating an additional segment margin of $44,200 per year for that product. What would be the financial advantage (disadvantage) of buying part U98 from the outside supplier and using the freed space to make more of the other product?

• A) ($105,600)
• B) ($23,000)
• C) $44,200
• D) ($111,400)

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Definitions:

River Channel

The physical confine of a river, consisting of a bed and banks, within which water flows in a significantly regulated manner.

Ultraviolet Energy

Electromagnetic radiation with a wavelength shorter than visible light but longer than X-rays, capable of producing chemical reactions and causing sunburn.

External Energy Source

An energy source that originates outside a system and can influence or drive processes within that system, such as solar radiation impacting the Earth's climate.

Infrared Energy

A form of electromagnetic energy with longer wavelengths than visible light; much of the Sun’s light that reaches Earth converts into this type of energy.