Prepare report-effect on companys total net operating income

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Reference no: EM13790103

Part O43 is used in one of Scheetz Corporation's products. The company's Accounting Department reports the following costs of producing the 17,100 units of the part that are needed every year.

Per Unit

Direct materials $4.30

Direct labor $5.00

Variable overhead $8.00

Supervisor's salary $8.70

Depreciation of special equipment $9.30

Allocated general overhead $6.30

An outside supplier has offered to make the part and sell it to the company for $32.00 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 $23,100 of these allocated general overhead costs would be avoided.

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. (Input the amount as a positive value. Omit the "$" sign in your response.)

Net operating income would ___________________ (increase/ decrease) by $___________.

b. Which alternative should the company choose?

a) Make

b) Buy

Reference no: EM13790103

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