Question

Supler Corporation produces a part used in the manufacture of one of its products. The unit product cost is $20, computed as follows:

Direct materials	$	6
Direct labor		7
Variable manufacturing overhead		3
Fixed manufacturing overhead		4
Unit product cost	$	20

An outside supplier has offered to provide the annual requirement of 7,200 of the parts for only $13 each. The company estimates that 50% 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

$5 per unit on average

($7) per unit on average

Answer 1

The financial advantage of purchasing the parts from the outside supplier would be $5 per unit on average ( $18 - $13 )

	Manufacturing	Buying
Purchase from outside suppliers		$13
Direct Materials	$6
Direct Labor	$7
Variable manufacturing overhead	$3
Fixed manufacturing overhead	$2
Total Cost	$18	$13

* Fixed manufacturing overhead = $4 x 50% = $2

Conclusion

Supler Corporation should buy the parts from the outside supplier, Since it gives the net advantage of $5 per unit