Question - Make or Buy practice:
Corporation makes 4000 units of part U13 each year. This part is used in one of the company's products. The company's accounting department reports the following costs of producing the part at this of activity:
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Per unit
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Direct materials
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$9.20
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Direct labor
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$4.40
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Variable manufacturing overhead
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$3.80
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Supervisor's salary
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$8.50
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Depreciation of special equipment
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$8.60
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Allocated general overhead
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$7.00
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An outside supplier has offered to make and sell the part to the company for $31 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. If the outside supplier's offer were accepted, only $3,000 of these allocated general overhead costs would be avoided. In addition, if the outside supplier's offer were accepted the space used to produce part U13 could be rented to another company for $13,000 per year. What would be the impact on the company's overall net operating income of buying part U13 from the outside supplier? What is the change in net operating income if they choose to buy U13 from outside? (Positive, Negative)?