Question Description
Instructions: Use excel or word only. Provide all supporting calculations to show how you arrived at your numbers
Question:
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 companys products. The unit cost of the component according to the companys 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:
Is the offer from the outside supplier financially attractive? Why?
