Use the following data for the next 2 questions:
A manufacturer operating with excess capacity has been asked to fill a special order at $7.25 per unit. The regular price is $10 per unit. No other use of the currently idle capacity can be found. The manufacturer's usual variable costs per unit are $3.50 for direct materials, $2.00 for direct labor, $1.00 for variable overhead, and $0.50 for sales commission. No sales commission would be paid on this special order. The average fixed overhead cost per unit is $0.25.
-Each year Wright's Widgets buys 10,000 subcomponents that it needs in the production of its widgets from an outside supplier for $15 each. If Wright instead used its existing idle capacity to produce it in-house, the variable production costs would be $8 per unit and $3 of fixed production overhead would be allocated to each unit. Additionally, Wright would need to hire one quality control technician for $28,000 per year. The excess capacity that would be required is currently leased to another company for $25,000 per year. What is the advantage or disadvantage if Wright continues to buy the subcomponent from the outside supplier?
A) $13,000 advantage
B) $17,000 disadvantage
C) $37,000 advantage
D) $3,000 disadvantage

Question

Quizplus · Accepted Answer

If Wright produces in-house, the total cost per unit would be $8 (variable) + $3 (fixed) + $2.80 (quality control technician cost per unit) = $13.80. The opportunity cost of $25,000 from leasing the capacity must also be considered. Buying from the supplier costs $15 per unit. For 10,000 units, buying costs $150,000, while producing in-house costs $138,000 + $25,000 = $163,000. Thus, continuing to buy results in a $17,000 disadvantage.

Use the Following Data for the Next 2 Questions