N.G., Inc. currently buys 9,000 subcomponents from an outside supplier at $10 each. The company has excess capacity, which it sublets to another company for $20,000 per year. If the company were to use the idle capacity to produce the subcomponent internally, it would incur variable production costs of $6 per unit, and it would hire a new supervisor for $15,000 per year. Other fixed overhead costs would not change, but the average overhead cost per subcomponent unit would be $2. What is the advantage or disadvantage (in dollars) if N.G. makes the subcomponent instead of continuing to buy outside and subletting the excess capacity?
A) $6,000 disadvantage
B) $21,000 disadvantage
C) $1,000 advantage
D) $21,000 advantage

Question

Quizplus · Accepted Answer

The advantage of making the subcomponent internally is calculated as follows: Current cost of buying externally = 9,000 units * $10 = $90,000. Cost of making internally = (9,000 units * $6 variable cost) + $15,000 supervisor + (9,000 units * $2 overhead) = $54,000 + $15,000 + $18,000 = $87,000. However, making internally also means losing the $20,000 from subletting. So, the total cost of making internally = $87,000 + $20,000 = $107,000. The advantage of making internally over buying externally is $90,000 - $107,000 = -$17,000, which means there's actually a disadvantage. However, since none of the provided options match this calculation, it appears there may have been an error in the calculation process. Considering the options given and recalculating: External purchase = $90,000. Internal production = $54,000 + $15,000 = $69,000 (excluding the incorrect addition of lost sublet income and overhead costs per unit, which should be included in the variable or fixed costs). Correcting for the oversight: Internal production costs including overhead = $54,000 (variable) + $15,000 (supervisor) + $18,000 (overhead) = $87,000. Lost income from subletting = $20,000. Total internal cost = $87,000. Net advantage/disadvantage = $90,000 (external) - $87,000 (internal) = $3,000 advantage, which is not directly reflected in the options provided, indicating a mistake in the initial explanation. Given the options and the correct approach to include all relevant costs and lost income: External = $90,000. Internal = $87,000 + $20,000 (lost sublet income) = $107,000. Thus, the correct calculation should reflect the comparison between continuing to buy and the total cost of internal production including lost opportunity, which would actually result in a disadvantage when considering the lost sublet income correctly. Given the discrepancy in the explanation and the need to align with the provided options, the correct approach involves comparing the total costs accurately and considering all factors, including lost income and additional costs associated with internal production.

NG, Inc Currently Buys 9,000 Subcomponents from an Outside Supplier at at $10