Question

Turner Company currently produces a part which has the following per unit cost:  

Direct materials $ 8  

Direct labor $3  

Variable overhead $1  

Fixed overhead    $5

   ______

   $17

Turner Company can buy the part from an outside supplier for $19 per unit. 60% of Turner Company’s fixed overhead would continue if the part is purchased. If the part is not manufactured by Turner, then the plant facilities can be rented for $60,000 per year. Turner Company is currently manufacturing 10,000 units (parts) per year.

Question: If Turner Company decides to buy the part from an outside supplier, what would be the net benefit (incremental income)?

Answer 1

Parts Purchased from Outside Supplier:

A	Cost of Outside Purchase of Parts	1,90,000
B	Savings in Cost:
	- Direct Material	80,000
	- Direct Labour	30,000
	- Variable Overhead	10,000
	- Fixed Overhead (40% of Total Fixed Cost)	20,000
		1,40,000
C	Additional Rental Income:	60,000
	Net Benefit / (Loss) of Outside Purchase	10,000
	[B+C-A]