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Purple Ltd. currently buys 9,000 subcomponents from an outside supplier at $10 each. The company...

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Accounting

Purple Ltd. currently buys 9,000 subcomponents from an outside supplier at $10 each. The company has excess capacity, which it sublets to another company for $20,000 per year. If Purple Ltd were to use the idle capacity to produce the subcomponent internally, it would incur variable production costs of $6 per unit, and it would hire a new supervisor for $15,000 per year. Other fixed overhead costs would not change, but the average fixed overhead cost per subcomponent unit would be $2. What is the advantage or disadvantage (in dollars) if Purple Ltd makes the subcomponent instead of continuing to buy outside and subletting the excess capacity?

a.

$1,000 advantage

b.

$21,000 advantage

c.

$6,000 disadvantage

d.

$21,000 disadvantage

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