Fancy Lighting Company makes 4,000 units per year of a part it uses in the luxury lighting products it manufactures. The unit product cost of this part is computed as follows: Direct materials $ 11.90 Direct labor 19.50 Variable manufacturing overhead 1.70 Fixed manufacturing overhead 9.60 Unit product cost $ 42.70 An outside supplier has offered to sell the company all of these parts it needs for $41.00 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a lighting product that is in high demand. The additional contribution margin on this other lighting product would be $32,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $ 6.50 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. Required: What is the financial advantage (disadvantage) of purchasing the part rather than making it?

Fancy Lighting Company makes 4,000 units per year of a part it uses in the luxury lighting products it manufactures. The unit product cost of this part is computed as follows: Direct materials $ 11.90 Direct labor 19.50 Variable manufacturing overhead 1.70 Fixed manufacturing overhead 9.60 Unit product cost $ 42.70 An outside supplier has offered to sell the company all of these parts it needs for $41.00 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a lighting product that is in high demand. The additional contribution margin on this other lighting product would be $32,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $ 6.50 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. Required: What is the financial advantage (disadvantage) of purchasing the part rather than making it?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter6: Activity-based, Variable, And Absorption Costing

Section: Chapter Questions

Problem 9PA: Carltons Kitchens makes two types of pasta makers: Strands and Shapes. The company expects to...

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