Reference no: EM132916625

McGraw Company uses 5,000 units of Part X each year as a component in the assembly of one of its medical equipment. The company is presently producing Part X internally at a total cost of $300,000, computed as follows:

Direct materials.................................  $ 45,000

Direct labor......................................... 90,000

Variable manufacturing overhead.. 30,000

Fixed manufacturing overhead....... 135,00

Total costs.......................................... $300,00

An outside supplier has offered to provide Part X at a price of $54 per unit. Assume that direct labor is a variable cost. If McGraw Company stops producing the part internally, one-third of the fixed manufacturing overhead would be eliminated.

REQUIRED:

Problem 1: The accountant suggested that the manufacturing of part X should be outsourced as the price offered is cheaper than the manufacturing cost per unit of $60 ($300,000/5,000 units). Do you agree with the accountant's suggestion? Why?