Question
Collins Co. produces a part used in the manufacture of one of its products. The unit product cost is $35, computed as follows: Direct materials,
Collins Co. produces a part used in the manufacture of one of its products. The unit product cost is $35, computed as follows:
Direct materials, direct labor, and variable overhead
$20
Fixed overhead
$15
Total
$35
An outside supplier has offered to provide the parts for only $30 each. If the parts are purchased from the outside supplier, (1) the company estimates that 40% of the fixed overhead cost above could be eliminated; (2) the company can use the freed capacity to launch a new product, earning a contribution margin of $6 per unit. Based on these data, the per-unit dollar financial advantage or disadvantage of purchasing from the outside supplier would be:
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