Reference no: EM132522101

An outside supplier has offered to make the part and sell it to the company for $20.00 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 $20,700 of these allocated general overhead costs would be avoided. In addition, the space used to produce part G18 could be used to make more of one of the company's other products, generating an additional segment margin of $21,000 per year for that product.

Required:

Question a. Calculate the effect on the company's total net operating income of buying part G18 from the supplier rather than continuing to make it inside the company.