Penagos Corporation is presently making part Z43 that is used in one of its products. A total of 5,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:

Penagos Corporation is presently making part Z43 that is used in one of its products. A total of 5,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:

	Per Unit
Direct materials	$	1.10
Direct labor	$	3.10
Variable overhead	$	6.90
Supervisor's salary	$	5.80
Depreciation of special equipment	$	5.20
Allocated general overhead	$	5.60

An outside supplier has offered to produce and sell the part to the company for $20.80 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 to the facts given above, assume that the space used to produce part Z43 could be used to make more of one of the company's other products, generating an additional segment margin of $24,000 per year for that product. What would be the annual financial advantage (disadvantage) of buying part Z43 from the outside supplier and using the freed space to make more of the other product?

Garrison 16e Rechecks 2017-09-13, 2017-12-15

Multiple Choice

• ($10,500)
• ($58,500)
• $24,000
• $8,500

  Correct

Explanation

	Make			Buy
Direct materials (5,000 units × $1.10 per unit)	$	5,500
Direct labor (5,000 units × $3.10 per unit)		15,500
Variable overhead (5,000 units × $6.90 per unit)		34,500
Supervisor's salary (5,000 units × $5.80 per unit)		29,000
Depreciation of special equipment (not relevant)		0
Allocated general overhead (avoidable only)		4,000
Outside purchase price (5,000 units × $20.80 per unit)				$	104,000
Opportunity cost					(24,000	)
Total cost	$	88,500		$	80,000

Buying the part rather than making it would decrease total cost by $8,500 per year.

Mcfarlain Corporation is presently making part U98 that is used in one of its products. A total of 7,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:

Mcfarlain Corporation is presently making part U98 that is used in one of its products. A total of 7,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:

	Per Unit
Direct materials	$	3.70
Direct labor	$	3.60
Variable overhead	$	1.40
Supervisor's salary	$	4.00
Depreciation of special equipment	$	3.90
Allocated general overhead	$	4.10

An outside supplier has offered to produce and sell the part to the company for $17.10 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, none of which would be avoided if the part were purchased instead of produced internally.

In addition to the facts given above, assume that the space used to produce part U98 could be used to make more of one of the company's other products, generating an additional segment margin of $24,000 per year for that product. What would be the financial advantage (disadvantage) of buying part U98 from the outside supplier and using the freed space to make more of the other product?

Multiple Choice

• ($6,800)

  Correct
• ($1,200)
• $24,000
• ($49,200)

Explanation

	Make
Direct materials (7,000 units × $3.70 per unit)	$	25,900
Direct labor (7,000 units × $3.60 per unit)		25,200
Variable overhead (7,000 units × $1.40 per unit)		9,800
Supervisor’s salary (7,000 units × $4.00 per unit)		28,000
Depreciation of special equipment (not relevant)		0
Allocated general overhead (not avoidable)		0
Opportunity cost		24,000
Total relevant cost to make	$	112,900

Total cost to purchase from the outside supplier (7,000 units × $17.10 per unit)	$	119,700
Total relevant cost to make		112,900
Additional cost to purchase	$	6,800

Ahrends Corporation makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Ahrends Corporation makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Direct materials	$	17.80
Direct labor		19.00
Variable manufacturing overhead		1.00
Fixed manufacturing overhead		17.10
Unit product cost	$	54.90

An outside supplier has offered to sell the company all of these parts it needs for $48.50 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 $273,000 per year.

If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $8.20 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 financial advantage (disadvantage) of purchasing the part rather than making it? (Round your intermediate calculations to 2 decimal places.)

Garrison 16e Rechecks 2017-09-13

Multiple Choice

• $273,000
• ($126,000)
• $147,000

  Correct
• $448,000

Explanation

Relevant cost to make: 

Direct materials	$	17.80
Direct labor		19.00
Variable manufacturing overhead		1.00
Avoidable fixed manufacturing overhead ($17.10 – $8.20)		8.90
Total relevant cost to make	$	46.70

Analysis of purchasing rather than making:
Cost savings ($46.70 per unit × 70,000 units)	$	3,269,000
Cost to purchase ($48.50 per unit × 70,000 units)		(3,395,000	)
Additional contribution margin from alternative use of facilities		273,000
Net advantage of purchasing	$	147,000

The Draper Corporation is considering dropping its Doombug toy due to continuing losses. Data on the toy for the past year follow:

The Draper Corporation is considering dropping its Doombug toy due to continuing losses. Data on the toy for the past year follow:

Sales of 15,000 units	$	150,000
Variable expenses		120,000
Contribution margin		30,000
Fixed expenses		40,000
Net operating loss	$	(10,000	)

If the toy were discontinued, Draper could avoid $8,000 per year in fixed costs. The remainder of the fixed costs are not avoidable.

Suppose that if the Doombug toy is dropped, the production and sale of other Draper toys would increase so as to generate a $16,000 increase in the contribution margin received from these other toys. If all other conditions are the same, the financial advantage (disadvantage) from discontinuing the production and sale of Doombugs would be:

Multiple Choice

• ($6,000)

  Correct
• $14,000
• ($2,000)
• $28,000

Explanation

Sales	$	150,000
Variable expenses		120,000
Contribution margin		30,000
Avoidable fixed expenses		8,000
Profit from Doombugs	$	22,000

However, even though the nominal profit from Doombugs is $22,000, dropping the product would increase the contribution margin received from other toys by $16,000. Therefore, the net effect on net operating income would be a $6,000 decrease (–$22,000 + $16,000).

Vanik Corporation currently has two divisions which had the following operating results for last year:

Vanik Corporation currently has two divisions which had the following operating results for last year:

	Cork Division			Rubber Division
Sales	$	600,000		$	350,000
Variable costs		250,000			220,000
Contribution margin		350,000			130,000
Traceable fixed costs		160,000			110,000
Segment margin		190,000			20,000
Allocated common corporate fixed costs		80,000			45,000
Net operating income (loss)	$	110,000		$	(25,000	)

Because the Rubber Division sustained a loss, the president of Vanik is considering the elimination of this division. All of the division’s traceable fixed costs could be avoided if the division was dropped. None of the allocated common corporate fixed costs could be avoided. If the Rubber Division was dropped at the beginning of last year, the financial advantage (disadvantage) to the company for the year would have been: 

Multiple Choice

• ($20,000)

  Correct
• $20,000
• $25,000
• ($25,000)

Explanation

If the Rubber Division had been eliminated, Vanik would have lost its segment margin of $20,000. Consequently, overall net operating income would have been $20,000 lower.