Tish Corporation produces a part used in the manufacture of one of its products.

Question

Tish Corporation produces a part used in the manufacture of one of its products. The unit product cost is $26, computed as follows:

Direct materials

$10

Direct labor

7

Variable manufacturing overhead

1

Fixed manufacturing overhead

8

Unit product cost

$26

An outside supplier has offered to provide the annual requirement of 5,000 of the parts for only $21 each. The company estimates that 75% 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 per-unit dollar advantage or disadvantage of purchasing from the outside supplier would be:

$1 disadvantage

$5 advantage

$3 advantage

$4 disadvantage

Direct materials

$10

Direct labor

7

Variable manufacturing overhead

1

Fixed manufacturing overhead

8

Unit product cost

$26

Explanation / Answer

if the company purchased from outside, it will be $3 advantage for company

Production cost $26 Total cost if it is purchased (Purchase cost+unavoidable fixed cost) $21 + ($8*25%) = $23 Difference $3

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.