Question

Supler Corporation produces a part used in the manufacture of one of its products. The unit product cost is $22, computed as follows: Direct materials $ 8 Direct labor 7 Variable manufacturing overhead 1 Fixed manufacturing overhead 6 Unit product cost $ 22 An outside supplier has offered to provide the annual requirement of 7,000 of the parts for only $16 each. The company estimates that 50% 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: Multiple Choice $1 per unit on average $3 per unit on average ($1) per unit on average ($6) per unit on average

Answer 1

financial advantage: $3 per unit on average

Step-by-step explanation:

total production cost $22

• Direct materials $8
• Direct labor $7
• Variable manufacturing overhead $1
• Fixed manufacturing overhead $6

outside supplier offered 7,000 units at $16 per unit

50% of fixed costs can be eliminated

produce the item purchase the item

units 7,000 7,000

purchase price $112,000

production cost $154,000

unavoidable costs $21,000

total $154,000 $133,000

net savings $21,000

savings per unit $3