Bulan 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 T6 is used in one of the company's products. The unit product cost of the component according to the company's cost accounting system is determined as follows: An outside supplier has offered to supply component T6 for $101 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. Bulan chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?

Question

Bulan 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 T6 is used in one of the company's products. The unit product cost of the component according to the company's cost accounting system is determined as follows:  An outside supplier has offered to supply component T6 for $101 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. Bulan chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?

Quizplus · Accepted Answer

The Answer of Bulan 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 T6 is used in one of the company's products. The unit product cost of the component according to the company's cost accounting system is determined as follows:  An outside supplier has offered to supply component T6 for $101 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. Bulan chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?

Bulan Inc Makes a Range of Products