Question

Supler Company produces a part used in the manufacture of one of its products. The unit product cost is $18, computed as follows:

Direct materials = $8

Direct labor = $4

Variable manufacturing overhead = $1

Fixed manufacturing overhead = $5

Unit product cost (total of above costs) = $18


An outside supplier has offered to provide the annual requirement of 4,000 of the parts for only $14 each. It is estimated that 60 percent of the fixed overhead cost above could be eliminated if the parts are purchased from the outside supplier. Based on these data, the per-unit dollar advantage or disadvantage of purchasing from the outside supplier would be:

$1 disadvantage

$1 advantage

$2 advantage

$4 disadvantage

show work please

Answer 1

$1 advantage

Step-by-step explanation:

Assuming the parts mentioned in this scenario is the only unit required for this product; it means the the direct cost is for this part only.

If the company purchase 4,000 of the parts for only $14 each from outside supplier, it can eliminate full of direct material/ labor and 60% of the fixed overhead cost; then the cost per unit = purchase cost $14 + Variable manufacturing overhead $1+ 40% of Fixed manufacturing overhead $5 = $17

So compared to fully inhouse production, the company can advantage $1 (=$18-$17) if it purchases parts from the outside supplier.