McGraw Company uses5,000 units of part X each year as a component in the assembly ofone of its products. The company is presently producing part Xinternally at a total cost of $100,000, computed as follows:
directmaterials......................................$15,000
directlabor.............................................$30,000
variable manufacturing overhead.....$10,000
fixed manufacturing overhead...........$45,000
totalcosts.................................................$100,000
An outside supplier has offered to provide part X at a price of $18per unit. If McGraw Company stops producing the part internally,one-third of the fixed manufacturing overhead would beeliminated.
Required:
Prepare an analysis showing the annual dollar advantage or disadvantage of accepting the outside supplier's offer.