Is offer from the outside supplier financially attractive

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Reference no: EM13519198

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:

Variable manufacturing overhead

$140,000

Fixed manufacturing overhead

$560,000

Direct labor-hours

35,000

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:

Direct materials

$ 45.00

Direct labor

32.00

Manufacturing overhead applied

40.00

Unit product cost

$117.00

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?

Reference no: EM13519198

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