Austin LTD. Manufactures a component that is used in the fans it produces. A supplier has offered...
Question:
Austin LTD. Manufactures a component that is used in the fans it produces. A supplier has offered to supply the component for $25 per part. The annual requirements of Austin are 20,000 components. Austin's cost detail of manufacturing the component is as follows:
Per Unit
| Direct materials | $9 |
| Direct labor | $5 |
| Variable overhead | $1 |
| Depreciation of equipment | $3 |
| Supervisor's salary | $2 |
| General factory overhead | $10 |
| Total | $30 |
It was determined that the special equipment has no resale value and cannot be used for another process. The factory overhead is an allocation and would be unaffected by the decision. The costs above are based on the same 20,000 units that the supplier would supply.
Should Austin continue to manufacture the component or purchase it from the outside supplier?
Direct Materials:
Direct Materials are the materials used that are directly traceable to the finished products. It is a cost that usually varies proportionally with the number of units produced and thus, is a variable cost. Most variable costs are also considered avoidable costs.
Answer and Explanation: 1
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View this answerShould Austin continue to manufacture the component or purchase it from the outside supplier?
The table below shows the avoidable costs associated...
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