Part E43 Is Used in One of Ran Corporation's Products

question 41

Essay

Part E43 is used in one of Ran Corporation's products. The company's Accounting Department reports the following costs of producing the 12,000 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 $14.70 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. If the outside supplier's offer were accepted, only $5,000 of these allocated general overhead costs would be avoided.
Required:
a. Prepare a report that shows the effect on the company's total net operating income of buying part E43 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?

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Definitions:

Benign

A term often used in a medical context to describe a condition, tumor, or growth that is not cancerous and does not pose a serious threat to health.

Regenerative Cycles

Processes or phenomena wherein systems can restore or rebuild themselves after damage or depletion.

Igbo People

An ethnic group native to Nigeria, known for their rich culture, language, and history.

South-eastern Nigeria

A geographic and cultural region of Nigeria known for its diverse ethnicities, languages, and rich history, including the Igbo people as a significant ethnic group.