Martinez, Inc. makes G18 internally. 16,000 units of this part are produced and used every year in making one of Martinez's products. The costs of producing G18, given the current level of activity, are as follows:
|
Per unit |
| Direct material |
$2.90 |
| Direct labor |
$3.90 |
|
Variable manufacturing overhead
|
$6.70 |
| Supervisor's salary |
$7.20 |
| Depreciation of special equipment |
$8.30 |
| Other allocated manufacturing overhead |
$5.40 |
One of Martinez's vendors has offered to sell the part to the company for $25.00 each. If Martinez stops making the part internally, the supervisor's salary and all of the variable costs can be avoided. There is a special piece of equipment that is used to make the part but it was purchased a number of years ago and has no salvage value or alternative use. 10% of the other allocated manufacturing overhead costs would be avoided if the part were purchased instead of produced internally.
The production manager at Martinez has pointed out that if the part were purchased, the extra space could be used to produce more of one of the company's products, generating an additional segment margin of $50,000 per year for that product.
If Martinez accepts the vendor's offer, what will the financial impact be on operations? (Note the dollar impact and whether net income would increase or decrease)