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?
| Make | Buy | |||||
| 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 | ||
The annual financial advantage of making the parts is $20,000.
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