McGraw Company uses 7,000 units of Part X each year as a component in the assembly of one of its products. The company is presently producing Part X internally at a total cost of $126,000, computed as follows:

Direct materials

Direct labor

Variable manufacturing overhead

Fixed manufacturing overhead

Total cost

$ 21,000

38,000

14,000

53,000

$ 126,000

An outside supplier has offered to provide Part X at a price of $18.80 per unit. If McGraw Company stops producing the part internally, one-third of the fixed manufacturing overhead would be eliminated. Assume that direct labor is a variable cost.

Required:

Prepare an analysis showing the annual financial advantage or disadvantage of accepting the outside supplier's offer.

Make

Buy

Outside purchase

Direct materials

Direct labor

Variable manufacturing overhead

Fixed manufacturing overhead

Total cost