Rosiek Corporation uses part A55 in one of its products.

Corporation uses part A55 in one of its products. The company’s accounting
department reports the following costs of producing the 4,000 units of the part
that are needed every year.

Per Unit
Materials $2.80
Labor $6.30
Overhead $8.50
Salary $2.60
of Special Equipment $6.80
General Overhead $6.10

outside supplier has offered to make the part and sell it to the company for
$32.30 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. The allocated general overhead represents fixed costs of the entire
company. If the outside supplier’s offer were accepted, only $4,000 of these
allocated general overhead costs would be avoided. In addition, the space used
to produce part A55 could be used to make more of one of the company’s other
products, generating an additional segment margin of $26,000 per year for that

i. Prepare a report that shows the effect on the company’s total net operating
income of buying part A55 from the supplier rather than continuing to make it
inside the company.
ii. Which alternative should the company choose? (Points : 15)

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