3. McGraw Company uses5,000 units of part X each year as a component in the asse

Question

       3. McGraw Company uses5,000 units of part X each year as a component in the assembly ofone of its products. The company is presently producing part Xinternally at a total cost of $100,000, computed as follows
directmaterials………………………………..$15,000
directlabor………………………………………$30,000
variable manufacturing overhead…..$10,000
fixed manufacturing overhead………..$45,000
totalcosts………………………………………….$100,000
An outside supplier has offered to provide part X at a price of $18per unit. If McGraw Company stops producing the part internally,one-third of the fixed manufacturing overhead would beeliminated.
Required:
Prepare an analysis showing the annual dollar advantage ordisadvantage of accepting the outside supplier’s offer

Explanation / Answer

                  Mc Graw company analysis of producing or buying outside                                                             Production cost per unit                  DirectMaterial                                              $ 3.00 (15,000/5,000) DirectLabor                                                     6.00 (30,000/5,000) Variablemanufacturing                                     2.00 (10,000/5,000) FixedManf.costs                                              9.00 (45,000/5,000) unit cost ofproduction                              20.00 The supplier offers for          $ 18.00 Fixed manf.costs (30,000/5,000)                                                   6.00 Unit cost of part X when supplied by anoutsider                                                  24.00 It is better to manufacture because the unit cost is less than thesupplier's cost.

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