Question

The RST Company makes 38,000 parts to be used in its main products. The cost per part at this activity level is:

Direct materials
$
6.50
Direct labor
$
6.60
Variable manufacturing overhead
$
3.75
Fixed manufacturing overhead
$
3.45




An outside supplier offered to supply RST Company this part at $18 per unit. If RST Company decides not to make the parts, there would be no other use for the production facilities and none of the fixed manufacturing overhead cost could be avoided. Direct labor is a variable cost. The annual financial advantage (disadvantage) for the company as a result of buying these parts from the outside supplier rather than making them internally would be:


($186,200)


($87,400)


($43,700)


$87,400

Answer 1

($43,700)

Step-by-step explanation:

38,000 units produced:

• Direct materials $ 6.50
• Direct labor $6.60
• Variable manufacturing overhead $3.75
• Fixed manufacturing overhead $3.45
• total cost per unit = $20.30

outside supplier offers parts at $18 per unit

fixed manufacturing overhead is unavoidable

Alternative 1 Alternative 2 Differential

keep producing buy amount

Prod. cost $771,400 $0 $771,400

Purchase cost $0 $684,000 ($684,000)

Unavoidable costs $0 $131,100 ($131,100)

total $771,400 $815,100 ($43,700)

The financial disadvantage of purchasing the parts from an outside vendor = ($43,700)