Reference no: EM132527224

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:

Variable manufacturing overhead ....... $225,000

Fixed manufacturing overhead ............ $630,000

Direct labor-hours ................................ 45,000

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:

Direct materials ......................................... $21.00

Direct labor ................................................ 40.80

Manufacturing overhead applied ...............      32.30

Unit product cost ....................................... $94.10

• 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:

Question 1: Is the offer from the outside supplier financially attractive? Why?