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?