Question

Gordon Corporation produces 1,000 units of a part per year which are used in the assembly of one of its products. The unit cost of producing these parts is:

Variable manufacturing cost $15
Fixed manufacturing cost 12
Total manufacturing cost $27
The part can be purchased from an outside supplier at $20 per unit. If the part is purchased from the outside supplier, two-thirds of the total fixed costs incurred in producing the part can be avoided. The annual financial advantage (disadvantage) for the company as a result of buying the part from the outside supplier would be: _____

Answer 1

Gordon Corporation produces 1,000 units of a part per year which are used in the assembly of one of its products. The unit cost of producing these parts is:

Variable manufacturing cost $15

Fixed manufacturing cost 12

Total manufacturing cost $27

The part can be purchased from an outside supplier at $20 per unit. If the part is purchased from the outside supplier, two-thirds of the total fixed costs incurred in producing the part can be avoided. The annual financial advantage (disadvantage) for the company as a result of buying the part from the outside supplier would be: $3000

Step-by-step explanation:

As calculated ,

Total relevant cost to make = 1000*(15+12/3*2)= $23000

Total relevant cost to buy = 1000*20 = $20000

Financial advantage of buying = Total relevant cost to make - Total relevant cost to buy = 23000-20000 = $3000

Hence,The annual financial advantage (disadvantage) for the company as a result of buying the part from the outside supplier would be: $3000