Supler Corporation produces a part used in the manufacture of one of its products. The unit product cost is $19, computed as follows: Direct materials $ 7 Direct labor 5 Variable manufacturing overhead 2 Fixed manufacturing overhead 5 Unit product cost $ 19 An outside supplier has offered to provide the annual requirement of 6,600 of the parts for only $15 each. The company estimates that 80% 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:

Answer :

Advantage = $3

Explanation :

As per the data given in the question,

Particulars                     Manufacturing                          buying

Purchase from outside suppliers                                  $15

Direct material                    $7

Direct labor                        $5

Variable manufacturing overhead $2

Fixed manufacturing overhead $4

Total cost                          $18                                              $15

Fixed manufacturing overhead = $5 × 80% = $4

Since it give the net advantage of $3

Hence, Supler Corporation should purchase from the outside supplier.

We compare the manufacturing and buying cost and according to the cost we take the decision. As we can see that the buying cost is less than the manufacturing cost so it would give the advantage of $3

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