Supler Company produces a part used in the manufacture of one of its products. T

Question

Supler Company produces a part used in the manufacture of one of its products. The unit product cost is $18, computed as follows:

Direct materials = $8
Direct labor = $4
Variable manufacturing overhead = $1
Fixed manufacturing overhead = $5
Unit product cost (total of above costs) = $18

An outside supplier has offered to provide the annual requirement of 4,000 of the parts for only $14 each. It is estimated that 60 percent of the fixed overhead cost above could be eliminated if the parts are purchased from the outside supplier. Based on these data, the per-unit dollar advantage or disadvantage of purchasing from the outside supplier would be:
$1 disadvantage
$1 advantage
$2 advantage
$4 disadvantage
show work please

Explanation / Answer

Costs that will be saved if you buy from outside are 8+4+1+5*.6= $16. Since it costs $14 there is a $2 advantage.

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