Lakeside Inc. produces a product that currently sells for $36 per unit. Current production costs per unit include direct materials, $10; direct labor, $12; variable overhead, $5; and fixed overhead, $5. Product engineering has determined that a certain part of the product conversion process could be outsourced. Raw material costs would not be affected, but direct labor and variable overhead costs would be reduced by 30%. No other opportunity is currently feasible for unused production capacity. Required: a. What would be the net cost advantage or disadvantage if Lakeview decided to outsource part of the conversion process at a cost of $4 per unit? (Round your final answer to 2 decimal places.) Net cost advantage or disadvantage $ b. Should Lakeside outsource part of the conversion process at a cost of $4 per unit?

Yes

No

Explanation:

a.

	Current Production Costs					Avoidable Cost if Purchased							Cost to Buy
Relevant cost analysis:
Manufacturing costs:
Direct material		$	10.00							$
Direct labor			12.00			(30	%	)
Variable overhead			5.00			(30	%	)
Fixed overhead			5.00
Total cost per unit		$	32.00
Purchase costs:
Conversion processing														$	4.00
Advantage to buy														$

b. pertinent qualitative factors should also be considered.