Gottshall Inc. makes a range of products. The company's predetermined overhead rate is $19 per direct labor-hour, which was calculated using the following budgeted data: Variable manufacturing overhead $ 225,000 Fixed manufacturing overhead $ 630,000 Direct labor-hours 45,000. Component P0 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 $ 21.00 Direct labor 40.80 Manufacturing overhead applied 32.30 Unit product cost $ 94.10 An outside supplier has offered to supply component P0 for $78 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. Gottshall chronically has idle capacity. Required: Is the offer from the outside supplier financially attractive? Explain why?

FINANCIAL ACCOUNTING
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ISBN:9781259964947
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Chapter1: Financial Statements And Business Decisions
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Gottshall Inc. makes a range of products. The company's predetermined overhead rate is $19 per direct labor-hour, which was calculated using the following budgeted data: Variable manufacturing overhead $ 225,000 Fixed manufacturing overhead $ 630,000 Direct labor-hours 45,000. Component P0 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 $ 21.00 Direct labor 40.80 Manufacturing overhead applied 32.30 Unit product cost $ 94.10 An outside supplier has offered to supply component P0 for $78 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. Gottshall chronically has idle capacity. Required: Is the offer from the outside supplier financially attractive? Explain why?
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