Problem:
Bulan Inc. makes a range of products. The company's predetermined overhead rate is $20 per direct labor-hour, which was calculated using the following budgeted data:
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Variable manufacturing overhead.................
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$140,000
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Fixed manufacturing overhead.....................
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$560,000
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Direct labor-hours.......................................
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35,000
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Component T6 is used in one of the company’s products. The unit product cost of the component according to the company’s cost accounting system is determined as follows:
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Direct materials.............................................
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$ 45.00
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Direct labor..................................................
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32.00
|
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Manufacturing overhead applied....................
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40.00
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Unit product cost..........................................
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$117.00
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An outside supplier has offered to supply component T6 for $101 each. The outside supplier is known for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision. Bulan chronically has idle capacity.
Required: Is the offer from the outside supplier financially attractive? Why?