Part O43 Is Used in One of Scheetz Corporation's Products

question 31

Essay

Part O43 is used in one of Scheetz Corporation's products.The company's Accounting Department reports the following costs of producing the 6,000 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 $26.40 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 $1,000 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 O43 from the supplier rather than continuing to make it inside the company.
b.Which alternative should the company choose?

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Definitions:

Good Faith

An implied promise to act honestly and not take unfair advantage in transactions.

Primarily Liable

Refers to the party or entity that bears the main responsibility in fulfilling an obligation or debt, without dependence on the failure of another party.

Personal Defenses

Legal defenses used in a lawsuit that are specific to the defendant, often relating to the contract's validity or terms.

Fraud in the Inducement

A deceitful act causing someone to enter into an agreement or contract by misrepresenting material facts or intentions.