McGraw Company uses 5,000 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 $100,000, computed as follows:   Direct materials$15,000?Direct labor 30,000?Variable manufacturing overhead 10,000?Fixed manufacturing overhead 45,000?Total cost$ 100,000?An outside supplier has offered to provide Part X at a price of $18 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. 

What will be an ideal response?



 MakeBuy
Outside purchase   $90,000 
Direct materials$15,000    
Direct labor 30,000    
Variable manufacturing overhead 10,000    
Fixed manufacturing overhead* 15,000    
Total cost$70,000 $90,000 
* 1/3 × $45,000 = $15,000

The annual financial advantage of making the parts is $20,000.

Business

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