Bady Inc.makes a range of products.The company's predetermined overhead rate is $14 per direct labor-hour,which was calculated using the following budgeted data: Component M3 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 M3 for $108 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.Bady chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?

Question

Bady Inc.makes a range of products.The company's predetermined overhead rate is $14 per direct labor-hour,which was calculated using the following budgeted data:   Component M3 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 M3 for $108 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.Bady chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?

Quizplus · Accepted Answer

The Answer of Bady Inc.makes a range of products.The company's predetermined overhead rate is $14 per direct labor-hour,which was calculated using the following budgeted data:   Component M3 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 M3 for $108 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.Bady chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?

Bady IncMakes a Range of Products