Gottshall Inc. makes a range of products. The company's predetermined overhead rate is $19 per direct labor-hour, which was calculated using the following budgeted data:
Component P0 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:
$\begin{array}{lr}
\text { Direct materials } & \$ 21.00 \
\text { Direct labor } & 40.80 \
\text { Manufacturing overhead applied } & 32.30 \
\text { Unit product cost } & \$ 94.10
\end{array}$ An outside supplier has offered to supply component P0 for $78 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. Gottshall chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?

Question

Gottshall Inc. makes a range of products. The company's predetermined overhead rate is $19 per direct labor-hour, which was calculated using the following budgeted data:
  Component P0 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:
 $\begin{array}{lr}
\text { Direct materials } & \$ 21.00 \
\text { Direct labor } & 40.80 \
\text { Manufacturing overhead applied } & 32.30 \
\text { Unit product cost } & \$ 94.10
\end{array}$ An outside supplier has offered to supply component P0 for $78 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. Gottshall chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?

Quizplus · Accepted Answer

The Answer of Gottshall Inc. makes a range of products. The company's predetermined overhead rate is $19 per direct labor-hour, which was calculated using the following budgeted data:
  Component P0 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:
 $\begin{array}{lr}
\text { Direct materials } & \$ 21.00 \
\text { Direct labor } & 40.80 \
\text { Manufacturing overhead applied } & 32.30 \
\text { Unit product cost } & \$ 94.10
\end{array}$ An outside supplier has offered to supply component P0 for $78 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. Gottshall chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?

Gottshall Inc An Outside Supplier Has Offered to Supply Component P0 for Overhead