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30 October, 07:08

Supler Corporation produces a part used in the manufacture of one of its products. The unit product cost is $22, computed as follows: Direct materials $ 7 Direct labor 8 Variable manufacturing overhead 3 Fixed manufacturing overhead 4 Unit product cost $ 22 An outside supplier has offered to provide the annual requirement of 4,700 of the parts for only $15 each. The company estimates that 50% of the fixed manufacturing overhead cost above could be eliminated if the parts are purchased from the outside supplier. Assume that direct labor is an avoidable cost in this decision. Based on these data, the financial advantage (disadvantage) of purchasing the parts from the outside supplier would be:

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  1. 30 October, 09:06
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    It is cheaper to buy the component.

    Financial advantage = $23,500

    Explanation:

    Giving the following information:

    Direct materials $7

    Direct labor $8

    Variable manufacturing overhead $3

    Fixed manufacturing overhead $4

    An outside supplier has offered to provide the annual requirement of 4,700 of the parts for only $15 each.

    First, we need to calculate the total cost of making the product:

    Production in-house:

    Total cost = (7 + 8 + 3 + 4) * 4,700 = 103,400

    Buy:

    Fixed costs = 2*4,700 = 9,400

    Buy = 4,700*15 = 70,500

    Total cost = 79,900

    It is cheaper to buy the component.

    Financial advantage = 103,400 - 79,900 = $23,500
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