Bady Inc. makes a range of products. The company's predetermined overhead rate is $14 per direct labor-hour, which was calculated using the following budgeted data: variable manufacturing overhead $100,000 fixed manufacturing overhead $250,000 direct labour hours 25,000 Component M3 is used in one of the company's products. The unit cost of the component according to the company's cost accounting system is determined as follows: direct materials $28 direct labor 56 manufacturing overhead applied 39.20 unit product cost 123.20 An outside supplier has offered to supply component M3 for $108 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 laborhours, and total fixed manufacturing overhead would not be affected by this decision. It should be noted that Bady Inc. chronically has idle capacity. Required: Is the offer from the outside supplier financially attractive? Why?
Bady Inc. makes a range of products. The company's predetermined
| variable manufacturing overhead | $100,000 |
| fixed manufacturing overhead | $250,000 |
| direct labour hours | 25,000 |
Component M3 is used in one of the company's products. The unit cost of the component according to the company's cost accounting system is determined as follows:
| direct materials | $28 |
| direct labor | 56 |
| manufacturing overhead applied | 39.20 |
| unit product cost | 123.20 |
An outside supplier has offered to supply component M3 for $108 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 laborhours, and total fixed manufacturing overhead would not be affected by this decision. It should be noted that Bady Inc. chronically has idle capacity. Required: Is the offer from the outside supplier financially attractive? Why?
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