9. Teche Corporation produces a part used in the manufacture of one of its produ

Question

9. 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. Direct materials $10 Direct labor 7 Variable manufacturing overhead 1 Fixed manufacturing overhead 8 Total product cost per unit $26 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

Direct materials........................................................................$10

Direct labor..............................................................................      7

Variable manufacturing overhead............................................1

Avoidable fixed manufacturing overhead (75% × $8)...........6

Relevant cost to make............................................................. $24

Because the part could be purchased from the outside supplier for $21, but costs $24 to make internally, purchasing theparts from the outside supplier would yield a $3 advantage

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