Tingstrom Inc. makes a range of products. The company's predetermined overhead rate is $20 per direct labor-hour, which was calculated using the following budgeted data:
Component B6 is used in one of the company's products. The unit cost of the component according to the company's cost accounting system is determined as follows:
An outside supplier has offered to supply component B6 for $76 each. The outside supplier is known for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision. Tingstrom chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?

Question

Tingstrom Inc. makes a range of products. The company's predetermined overhead rate is $20 per direct labor-hour, which was calculated using the following budgeted data:  
Component B6 is used in one of the company's products. The unit cost of the component according to the company's cost accounting system is determined as follows:  
An outside supplier has offered to supply component B6 for $76 each. The outside supplier is known for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision. Tingstrom chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?

Quizplus · Accepted Answer

The Answer of Tingstrom Inc. makes a range of products. The company's predetermined overhead rate is $20 per direct labor-hour, which was calculated using the following budgeted data:  
Component B6 is used in one of the company's products. The unit cost of the component according to the company's cost accounting system is determined as follows:  
An outside supplier has offered to supply component B6 for $76 each. The outside supplier is known for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision. Tingstrom chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?