Pitkin Company produces a part used in the manufacture of one of its products.The unit product cost of the part is $33,computed as follows: $\begin{array}{l}
\begin{array}{lll}
\text { Direct Materials}\
\text { Direct Labour}\
\text { Variable Manufacturing Overhead}\
\text { Fixed Manufacturing Overhead}\
\text { Unit Product Cost}\
\end{array}
\begin{array}{lll}
\$ 12 \
\$ 8 \
\$ 3 \
\$ 10\
\$ 33
\end{array}
\end{array}$
An outside supplier has offered to provide the annual requirement of 10,000 of the parts for only $27 each.The company estimates that 30% of the fixed manufacturing overhead costs above will continue if the parts are purchased from the outside supplier.Assume that direct labour is an avoidable cost in this decision.Based on these data,what will be the per-unit dollar advantage or disadvantage of purchasing the parts from the outside supplier?
A) $1 advantage.
B) $1 disadvantage.
C) $3 advantage.
D) $4 disadvantage.

Question

Pitkin Company produces a part used in the manufacture of one of its products.The unit product cost of the part is $33,computed as follows: $\begin{array}{l}
\begin{array}{lll}
\text { Direct Materials}\
\text { Direct Labour}\
\text { Variable Manufacturing Overhead}\
\text { Fixed Manufacturing Overhead}\
\text { Unit Product Cost}\
\end{array}
\begin{array}{lll}
 \$ 12 \
\$ 8 \
\$ 3 \
 \$ 10\
 \$ 33
\end{array}
\end{array}$
 An outside supplier has offered to provide the annual requirement of 10,000 of the parts for only $27 each.The company estimates that 30% of the fixed manufacturing overhead costs above will continue if the parts are purchased from the outside supplier.Assume that direct labour is an avoidable cost in this decision.Based on these data,what will be the per-unit dollar advantage or disadvantage of purchasing the parts from the outside supplier?
A) $1 advantage.
B) $1 disadvantage.
C) $3 advantage.
D) $4 disadvantage.

Quizplus · Accepted Answer

The cost to make the part is $33, but if purchased, the cost is $27. The avoidable costs when making the part are $8 (Direct Labour) + $3 (Variable Manufacturing Overhead) + $7 (70% of Fixed Manufacturing Overhead), totaling $30. Therefore, purchasing the part results in a $3 advantage per unit ($30 - $27).

Pitkin Company Produces a Part Used in the Manufacture of One