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: 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:

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?

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:  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?