Flavell Corporation is presently making part R152 that is used in one of its products. A total of 8,000 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:
An outside supplier has offered to make and sell the part to the company for $14.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs 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.
a. If management decides to buy part R152 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income? SHOW all work to support your response.
b. What would you recommend and why?