Recher Corporation uses part Q89 in one of its products. Thecompany's Accounting Department reports the following costs ofproducing the 8,000 units of the part that are needed everyyear.
| Per Unit |
| Direct materials | $ | 8.10 |
| Direct labor | $ | 4.40 |
| Variable overhead | $ | 8.60 |
| Supervisor's salary | $ | 3.20 |
| Depreciation of special equipment | $ | 2.60 |
| Allocated general overhead | $ | 1.30 |
|
An outside supplier has offered to make the part and sell it to thecompany for $27.60 each. If this offer is accepted, thesupervisor's salary and all of the variable costs, including directlabor, can be avoided. The special equipment used to make the partwas purchased many years ago and has no salvage value or other use.The allocated general overhead represents fixed costs of the entirecompany. If the outside supplier's offer were accepted, only $3,000of these allocated general overhead costs would be avoided. Inaddition, the space used to produce part Q89 could be used to makemore of one of the company's other products, generating anadditional segment margin of $16,000 per year for that product.
Required:
a. Prepare a report that shows the financial impact of buying partQ89 from the supplier rather than continuing to make it inside thecompany.
b. Which alternative should the company choose?
