Question

Supler Corporation produces a part used in the manufacture of one of its products. The unit product cost is $21, computed as follows: Direct materials $ 7 Direct labor 6 Variable manufacturing overhead 3 Fixed manufacturing overhead 5 Unit product cost $ 21 An outside supplier has offered to provide the annual requirement of 2,900 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: Multiple Choice ($3) per unit on average $3 per unit on average $6 per unit on average ($8) per unit on average

Answer 1

Answer: $6 per unit on average

Explanation:

Since 60% of the fixed manufacturing overhead can be eliminated when the parts are bought from an outside supplier, therefore (100% - 60%) = 40% are unavoidable when when it buys from suppliers outside.

Therefore, the unit product cost when the parts are bought will be:

= Purchase cost + Unavoidable fixed manufacturing overhead

= $13 + ( 40% * $5 )

= $15

Then, the financial advantage (disadvantage) will be:

= $21 - $15

= $6

Therefore, the correct option is $6 per Unit on average.