An outside supplier has offered to provide the annual requirement of 5,500 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 co data, the financial advantage (disadvantage) of purchasing the parts from the outside supplier would be:

Question

Keegan Hendricks

Business

23 December, 09:55

An outside supplier has offered to provide the annual requirement of 5,500 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 co data, the financial advantage (disadvantage) of purchasing the parts from the outside supplier would be:

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Finley Vance · Answer 1

The the financial advantage (disadvantage) of purchasing the parts from the outside supplier would be $6 per unit on average.

Explanation:

If Supler Corporation buys from an outside supplier, then they will not incur any variable cost. Also it is given that 60% of the fixed manufacturing overhead will be eliminated if the parts are purchased from an outside supplier, it means that 40% of the fixed manufacturing overhead are unavoidable and it will continue to incur 40% of the fixed manufacturing overhead even when that parts are purchased from outside supplier.

Unit product cost when the parts are purchased = Purchase cost + Unavoidable fixed manufacturing overhead = $13 + (40% * $5) = $15

Unit product cost when produced $21

(-) Unit product cost when purchased from outside supplier ($15)

Financial advantage (disadvantage) $6

Therefore, The the financial advantage (disadvantage) of purchasing the parts from the outside supplier would be $6 per unit on average.