Question

Lion Company makes 10,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct materials $ 13.2 Direct labor 20.8 Variable manufacturing overhead 3.00 Fixed manufacturing overhead 10.90 Unit product cost 47.90 An outside supplier has offered to sell the company all of these parts it needs for $42.30 a unit. $6.40 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. (a). What is the net total dollar advantage or disadvantage of purch

Answer 1

It the company buys the units, the effect on income will be an $8,000 decrease.

Step-by-step explanation:

Giving the following information:

Production costs:

Direct materials= $13.2

Direct labor= 20.8

Variable manufacturing overhead= 3.00

Avoidable fixed manufacturing overhead= 4.5

Unitary cost= $41.5

Outside supplier offer= 10,000 units for $42,3 each

We need to calculate the relevant total cost of each option.

Make in-house:

Total relevant cost= 10,000*41.5= $415,000

Buy:

Total relevant cost= 10,000*42.3= $423,000

It the company buys the units, the effect on income will be an $8,000 decrease.