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The management of Mulligan Manufacturing Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier

Accounting

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The management of Mulligan Manufacturing Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called QTHAFEE, is a component of the company’s finished product.

The following information was collected from the accounting records and production

data for the year ending December 31, 2019.

1. 6,000 units of QTHAFEE were produced in the Machining Department.

2. Variable manufacturing costs applicable to the production of each QTHAFEE unit were: direct materials $5.00, direct labor $4.60, indirect labor $0.40, utilities $0.30.(10.3)

3. Fixed manufacturing costs applicable to the production of QTHAFEE were: $5,000 direct and $3,400 allocated. All variable manufacturing and direct fixed costs will be eliminated if QTHAFEE is purchased. Allocated costs will have to be absorbed by other production departments.

4. The lowest quotation for 6,000 QTHAFEE units from a supplier is $56,000.

5. If QTHAFEE units are purchased, freight and inspection costs would be $0.40 per unit, receiving costs totaling $800 per year would be incurred by the Machining

Department, and Mulligan Company has the opportunity to produce$12,000 of net income with the facilities currently being used to manufacture QTHAFEE.

What is the effect of buy-not- make decision on profit?