Question
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:
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:
Variable manufacturing overhead $140,000
Fixed manufacturing overhead $560,000
Direct labor-hours 35,000
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:
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 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 laborhours, 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?
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