Bale 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:

Variable manufacturing overhead ............. $140,000

Fixed manufacturing overhead .................. $560,000

Direct labor-hours ...................................... 35,000

Component B26 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:

Direct materials ........................................... $ 45.00

Direct labor .................................................. 32.00

Manufacturing overhead applied ................. 40.00

Unit product cost ......................................... $117.00

An outside supplier has offered to supply component B26 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. Bale chronically has idle

capacity.

Required (10 Marks)

1. Is the offer from the outside supplier financially attractive? Why? Show calculations!

2. What are the probable reasons for a company to buy inputs from outsiders even

though "making" is cheaper to them?

3. What are the probable reasons for a company to make their inputs even though

"buying from outside supplier" is cheaper to them?