Reference no: EM133535465

Case Study: Karbon Corporation uses part B76 in one of its products. The company's Accounting Department reports the following costs of producing the 12,000 units of the part that are needed every year.

• Direct Materials $8.20
• Direct Labour $6.10
• Variable Overhead $3.50
• Production Supervisor's salary $4.70
• Depreciation on Equipment $3.40
• Allocated general overhead $2.40

An outside supplier has offered to make the part and sell it to the company for $27.40 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labour, can be avoided. The equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents the fixed costs of the entire company. If the outside supplier's offer were accepted, only $6,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part B76 could be rented out generating an additional income of $29,000 per year.

Required:

a. Prepare a report that shows the effect on the company's total net operating income of buying part B76 from the supplier rather than continuing to make it inside the company.

b. Which alternative should the company choose, make or Buy? Why?