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Supler Corporation produces a part used in the manufacture of one of its products. The unit product...

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Accounting

Supler Corporationproduces a part used in the manufacture of one of its products. Theunit product cost is $21, computed as follows:

Directmaterials$7
Directlabor6
Variablemanufacturing overhead3
Fixedmanufacturing overhead5
Unit productcost$21

An outside supplierhas offered to provide the annual requirement of 2,900 of the partsfor only $13 each. The company estimates that 60% of the fixedmanufacturing overhead cost above could be eliminated if the partsare purchased from the outside supplier. Assume that direct laboris an avoidable cost in this decision. Based on these data, thefinancial advantage (disadvantage) of purchasing the parts from theoutside supplier would be:

Multiple Choice

  • ($3) per unit on average

  • $3 per unit on average

  • $6 per unit on average

  • ($8) per unit on average

Answer & Explanation Solved by verified expert
4.3 Ratings (940 Votes)

Supler Corporation
Relevant cost of manufacturing
Direct Material $       7.00
Direct Labor $       6.00
Variable Manufacturing cost $       3.00
Fixed Manufacturing cost($5*60%) $       3.00
Total Relevant cost $    19.00
Cost of purchase from outside supplier $    13.00
Net Advantage
Relevant cost of purchasing $    19.00
Less: Cost of purchase from outside supplier $   -13.00
Ans ) Net Advantage $       6.00 per unit on average
Relevant cost : All cost which influence the decision.
Sunk cost: Cost which is not avoided,so irrelevant for decision, in this case 40% of fixed cost are sunk cost.

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