Question

Wayfair Corporation produces a part used in the manufacture of one of its products. The unit product cost is $21, computed as follows: Direct materials $ 8 Direct labor 5 Variable manufacturing overhead 3 Fixed manufacturing overhead 5 Unit product cost $ 21 An outside supplier has offered to provide the annual requirement of 2,900 of the parts for only $16 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

It is more convenient to buy the component from the outside supplier.

Step-by-step explanation:

Giving the following information:

Make in-house:

Direct materials $8

Direct labor $5

Variable manufacturing overhead $3

Fixed manufacturing overhead $5

Unit product cost $ 21

Outside supplier:

Units= 2,900

Selling price= $16

80% of the fixed manufacturing overhead costs are avoidable.

We need to calculate the total cost of each option and choose the cheapest.

Produce in-house:

Total cost= 21*2,900= $60,900

Buy:

Total cost= 16*2,900 + (5*0.2)*2,900= $49,300

It is more convenient to buy the component from the outside supplier.