Turner Company currently produces a part which has the following per unit cost:

Question

Turner Company currently produces a part which has the following per unit cost:  

Direct materials $ 8  

Direct labor $3  

Variable overhead $1  

Fixed overhead    $5

   ______

   $17

Turner Company can buy the part from an outside supplier for $19 per unit. 60% of Turner Company’s fixed overhead would continue if the part is purchased. If the part is not manufactured by Turner, then the plant facilities can be rented for $60,000 per year. Turner Company is currently manufacturing 10,000 units (parts) per year.

Question: If Turner Company decides to buy the part from an outside supplier, what would be the net benefit (incremental income)?

Explanation / Answer

Parts Purchased from Outside Supplier:

A Cost of Outside Purchase of Parts          1,90,000 B Savings in Cost: - Direct Material             80,000 - Direct Labour             30,000 - Variable Overhead             10,000 - Fixed Overhead (40% of Total Fixed Cost)             20,000          1,40,000 C Additional Rental Income:             60,000 Net Benefit / (Loss) of Outside Purchase             10,000 [B+C-A]

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