McGraw Company uses 9,500 units of Part X each year as a component in the...
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Accounting
McGraw Company uses 9,500 units of Part X each year as a component in the assembly of one of its products. The company is presently producing Part X internally at a total cost of $158,500, computed as follows:
Direct materials
$ 28,500
Direct labor
48,000
Variable manufacturing overhead
19,000
Fixed manufacturing overhead
63,000
Total cost
$ 158,500
An outside supplier has offered to provide Part X at a price of $19.80 per unit. If McGraw Company stops producing the part internally, one-third of the fixed manufacturing overhead would be eliminated. Assume that direct labor is a variable cost.
Required:
Prepare an analysis showing the annual financial advantage or disadvantage of accepting the outside supplier's offer.
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