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
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
Question: If Turner Company decides to buy the part from an outside supplier, what would be the net benefit (incremental income)?
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|
|C||Additional Rental Income:||60,000|
|Net Benefit / (Loss) of Outside Purchase||10,000|
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