Question

Supler Corporation produces a part used in the manufacture of one of its products. The unit product cost is $25, computed as follows: Direct materials $ 8 Direct labor 8 Variable manufacturing overhead 3 Fixed manufacturing overhead 6 Unit product cost $ 25 An outside supplier has offered to provide the annual requirement of 3,800 of the parts for only $14 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:

Answer 1

Answer:

financial advantage : $30,400

Explanation:

Analysis of the Make or Buy Decision

Purchase Cost (3,800×$14)                                    (53,200)

Savings :

Fixed manufacturing overhead($6×50%×3,800)     11,400

Direct Labor ($8×3,800)                                           30,400

Direct materials ($8×3,800)                                     30,400

Variable manufacturing overhead (3×3,800)           11,400

Financial Advantage                                                30,400

Therefore, the financial advantage of purchasing the parts from the outside supplier would be $30,400.