Question

Supler Corporation produces a part used in the manufacture of one of its products. The unit product cost is $21, computed as follows:

Direct materials $ 6
Direct labor 8
Variable manufacturing overhead 2
Fixed manufacturing overhead 5
Unit product cost $ 21

An outside supplier has offered to provide the annual requirement of 6,500 of the parts for only $13 each. The company estimates that 80% 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

Option 3 ( $2 advantage) is correct.

Step-by-step explanation:

Costs that will be saved if you buy from outside are 8+4+1+5*.6= $16.

Since it costs $14 there is a $2 advantage.