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

question 175

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?

Grasp the limitations of using operating income as a single measure of performance.

Comprehend the distinct functions and responsibilities of a profit center manager with respect to asset investments.

Recognize the importance of including only controllable revenues and expenses in a profit center's income statement.

Understand the advantages of using return on investment (ROI) and residual income as performance measures.

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Definitions:

Null Hypothesis

A statement used in statistics that proposes there is no significant difference or effect, serving as the starting point for testing.

Significance Level

A threshold in hypothesis testing that determines whether a result is statistically significant; often denoted by alpha (α).

Partitioning

The process of allocating the total sum of squares and degrees of freedom to the various components.

Sum of Squares

A statistical technique used to describe the total variation or dispersion of a set of values around the mean; used in various analyses, including variance and regression.