An outside supplier has offered to produce and sell the part to the company for $23.40 each. If this offer is accepted, the supe

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An outside supplier has offered to produce and sell the part to the company for $23.40 each. If this offer is accepted, the supe

rvisor'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 $18,800 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?

Business

1 answer:

arsen [3.2K] · Answer 1 · 2026-03-29T01:11:40+03:00

It indicates a financial advantage of $18,800 for accepting the offer. Kleffman Corporation currently produces part X31 with an annual output of 2,000 units. According to their accounting data, the production costs at this level are as follows: DM $6.90, DL $4.90, V MO $8.00, Supervisor $2.20, Depreciation $1.40, General $2.80, totaling $26.20 per unit. The unavoidable cost amounts to $2.80 x 2,000 units = $5,600. The depreciation is treated as a sunk cost, reflecting no cash flow impact on the business. Making the part internally results in a total expenditure of $52,400. The potential opportunity cost associated with generating an additional segment margin of $18,800 comes into play. The total cost aligns at $71,200 against the purchase cost of $23.40 x 2,000 = $46,800. The unavoidable cost remains at $5,600, resulting in a total of $52,400 when taken into account. Thus, the differential is computed as 71,200 - 52,400 = 18,800.