Answer:
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
