Rosiek Corporation Uses Part A55 in One of Its Products

question 89

Essay

Rosiek Corporation uses part A55 in one of its products. The company's Accounting Department reports the following costs of producing the 4,000 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 $32.30 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 $4,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part A55 could be used to make more of one of the company's other products, generating an additional segment margin of $26,000 per year for that product.
Required:
a. Prepare a report that shows the effect on the company's total net operating income of buying part A55 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?

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Definitions:

Value Drivers

Factors that significantly impact the value of a company's products or services, which in turn affect the company's profitability and market value.

Decrease Value

A reduction in the worth or value of an asset or entity.

Staff Motivation

The level of energy, commitment, and creativity that a company's workers bring to their jobs.

Goal Congruence

Goal congruence refers to the alignment of objectives among different members or parts of an organization, ensuring that all efforts contribute towards the overarching goals.