Teche Corporation produces a part used in the manufacture of one of its products

Question

Teche Corporation produces a part used in the manufacture of one of its products. The unit product cost is $26, computed in the table below by the company's accountant. An outside supplier has offered to provide the annual requirement of 5,000 of the parts for only $21 each. The company estimates that 75% of the fixed manufacturing overhead cost in the table above could be eliminated if the parts are purchased from the outside supplier. Assume that direct labor is an avoidable cost for this decision. Based on the data given, calculate the per-unit dollar advantage, or disadvantage, if Teche purchases the part from the outside supplier. In order to be marked correct, your answer must have BOTH the correct dollar amount per unit, and either the (correct) word ADVANTAGE or DISADVANTAGE. No partial credit.

Explanation / Answer

Ans-

Answer is $3 per unit advantage in buy option and here is the calculation

Make Buy Per unit Dollar Cost per unit Cost per unit Advantage/(Disadvantage) Direct materials $            10.00 $                                     -   Direct labor $              7.00 $                                     -   Variable overhead costs $              1.00 $                                     -   Fixed manufacturing costs $              8.00 2(25% of original cost) Purchase price $                              21.00 Total annual cost $            26.00 $                              23.00 $                                       3.00

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