Question :
Part F77 is used in one of Wilcutt Corporation's products. The company's Accounting Department reports the subsequent costs of producing the 7,000 units of the part that are required every year.
Direct Materials 7.00
Direct Labor 6.00
Variable Overhead 5.60
Supervision's Salary 4.70
Depreciation of Special Eqto 1.50
Allocated General overhead 5.40
An outside supplier has provided to make the part and sell it to the company for $28.30 each. If this offer is accepted, the supervisor's salary and all of the variable costs, adding direct labor, will be avoided. The special equipment used to make the part was purchased various years ago and has no salvage value or other use.
The allocated general overhead shows fixed costs of the entire company. If the outside supplier's provide were accepted, only $9,000 of these allocated general overhead costs would be avoided.
Required:
i. Prepare a report that indicates the effect on the company's total net operating income of buying part F77 from the supplier rather than continuing to make it inside the company.
ii. Which alternative could the company choose?