Aholt Corporation Makes 40, 000 Units Per Year of a Part

question 128

Multiple Choice

Aholt Corporation makes 40, 000 units per year of a part it uses in the products it manufactures.The unit product cost of this part is computed as follows: An outside supplier has offered to sell the company all of these parts it needs for $46.20 a unit.If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand.The additional contribution margin on this other product would be $264, 000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided.However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier.This fixed manufacturing overhead cost would be applied to the company's remaining products.
What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?

• A)$264, 000
• B)$(328, 000)
• C)$548, 000
• D)$(64, 000)

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Definitions:

Reportable Segment

A component of a business that earns revenues and incurs expenses, and for which separate financial information is available and regularly reviewed by the entity's chief operating decision-maker in deciding how to allocate resources and assess performance.

Operating Segment

A component of a business that engages in business activities from which it may earn revenues and incur expenses, and for which discrete financial information is available.

Asset Group

A collection of assets that share similar characteristics and are accounted for together in financial reporting.

Production Phase

The production phase is the period in a business cycle when raw materials are converted into finished products.