2. Clifford, Inc. currently manufactures 2,000 subcomponents in one of its facto

Question

2. Clifford, Inc. currently manufactures 2,000 subcomponents in one of its factories. The unit costs to produce the subcomponents are:

75

90

The unit costs to produce are: Due to a labor strike, Clifford is considering purchasing the subcomponents from an outside supplier for $250 per unit rather than paying the 10% increase in direct labor costs demanded by the union. Ten percent of fixed overhead is avoidable. If Clifford purchases the subcomponent from the outside supplier, how much will profit differ from what it would be if it manufactured the subcomponents with the increase in direct labor cost?

a. $30,000 less

b. $20,000 less

c. $10,000 more

d. $8,000 more

Please show your work.

Direct Materials 60 Direct Labor 100 Variable Manufacturing Overhead

75

Fixed Manufacturing Overhead

90

Total Unit Cost 325

Explanation / Answer

The correct option is d. $ 8,000 more. If Clifford opts for outsourcing the subcomponent, cost will decrease by $ 8,000, and profit will increase by the same amount.

Workings:

Manufacture Outsource Direct material cost (2,000 x 60) 120,000 Direct labor cost (2,000 x 110) 220,000 Variable manufacturing overhead(2,000 x75) 150,000 Total variable cost 490,000 Purchase cost 500,000 Avoidable fixed cost(2,000 x 90 x 10%) 18,000 Total cost 508,000 500,000

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