James company produces a part used in the manufacture of one of its products. Th

Question

James company produces a part used in the manufacture of one of its products. The unit product cost of the part is $33, computed as follows. Direct material $12 Direct labor $8 Variable manufacturing overhead $3 Fixed Manufacturing overhead $10 Unit Product cost $33 An outside supplier has offered to provide the annual requirement of 10,000 of the parts for only $27 each. The company estimates that 30% of the fixed manufacturing overhead costs above will continue if the parts are purchased from the outside supplier. All direct and variable costs are avoidable if the part is purchased from the supplier. Based on these data, The advantage or disadvantage per unit of purchasing the parts from the outside supplier would be?

Explanation / Answer

Calculate advantage or disadvantage per unit of purchasing the parts from the outside supplier would be :

Advantage of $3 per unit if purchasing the parts from the outside supplier.

Make Buy Direct material 12 Direct labour 8 Variable manufacturing overhead 3 Fixed manufacturing overhead (10*70%) 7 Purchase cost 27 Total 30 27

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