Lucky Corporation produces a part used in the manufacture of one of its products. The unit product cost is $21, computed as follows: Direct materials $ 6 Direct labor 8 Variable manufacturing overhead 1 Fixed manufacturing overhead 6 Unit product cost $ 21 An outside supplier has offered to provide the annual requirement of 6,000 of the parts for only $14 each. The company estimates that 50% of the fixed manufacturing overhead cost above could be eliminated if the parts are purchased from the outside supplier. Assume that direct labor is an avoidable cost in this decision. Based on these data, the financial advantage (disadvantage) of purchasing the parts from the outside supplier would be:

Lucky Corporation

The total financial advantage of purchasing the parts from the outside supplier would be:

= $24,000.

Explanation:

a) Data and Calculations:

Direct materials                           $ 6

Direct labor                                     8

Variable manufacturing overhead 1

Fixed manufacturing overhead     6

Unit product cost                      $ 21

Cost of parts per unit from outside supplier = $14

Relevant Costs:

Direct materials                           $ 6

Direct labor                                     8

Variable manufacturing overhead 1

Fixed manufacturing overhead     3 ($6 * 50%)

Unit product cost                      $ 18 relevant

This relevant unit product cost of $18 is compared with the $14 charged by the outside supplier to determine financial advantage or disadvantage.

Total financial advantage of purchasing the parts from the outside supplier would be $$24,000 (6,000 * $4).

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explanation:

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