Gottshall Incorporated 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:
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?

Question

Gottshall Incorporated 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:
  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?

Quizplus · Accepted Answer

The Answer of Gottshall Incorporated 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:
  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?

Gottshall Incorporated Makes a Range of Products