Question

XYZ Co. produces a part used in the manufacture of one of its products. The unit product cost is $30, computed as follows: Direct materials, direct labor, and variable overhead $22 Fixed overhead $8 Total $30 An outside supplier has offered to provide the parts for only $25 each. The company estimates that 25% of the fixed manufacturing 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: A. $3 disadvantage B. $1 advantage C. $1 disadvantage D. $3 advantage

Answer 1

fixed manufacturing overhead = $8

given fixed manufacturing overhead is reduced by 25% if parts are purchased from outside supplier

new fixed overhead will be = $8 - 25% which is $6

Hence fixed manufacturing overhead is reduced by $2

New product cost = $30 - $2 which is $28

outside supplier gives the part at $25

As unit product cost is decreasing if part is purchased from outside supplier:-

Reduction in cost if part is purchased from outside supplier = $28 - $25 which is $3 (advantage)

Hence correct answer is (D) $3 advantage.