An outside supplier has offered to provide the annual requirement of 7,200 of the parts for only $13 each. The company estimates that 60% 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:

Super corporation produces a part in the manufactures of its product. The unit cost is $21 computed as follows:

An outside supplier has offered to provide the annual requirement of 7,200 of the parts for only $13 each. The company estimates that 60% 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:

$

Direct material 6

Direct labour 8

Variable manufacturing overhead 2

Fixed manufacturing overhead 5

Total cost 21

Answer:

Total financial advantage of buying from the supplier $43,200

Explanation:

Unit relevant variable cost of making = 6+8 + 2 = 16

$

Variable cost of making (16 * 7200) = 115,200

Variable of buying (13 * 7200) 93,600

Savings in variable cost 21,600

Savings in fixed cost (60%*72300 * 5) 21600

Total savings from buying 43,200

Total financial advantage of buying from the supplier $43,200