Question

Grand Limited currently produces a component of a product with the following per unit production costs:

Direct materials	$19
Direct labour	33
Overhead	18
Total production costs	$70

Grand Ltd. currently manufactures these components in-house, averaging production of 29227 units each year. A supplier has approached the company offering to supply 29227 units each year at a cost of $50 each.

60% of the overhead is fixed and if Grand Ltd. purchases the components, then 1/3 of the fixed overhead costs would be avoidable.

What is Grand’s net advantage to buying the component from the supplier?

Select one:

a. $374106

b. $233816

c. $444250

d. $268888

Answer 1

Direct Materials	$                    19.00
Direct labor	$                    33.00
Variable overhead($18*40%)	$                      7.20
Variable Production cost	$                    59.20
Add:Avoidable Fixed Costs($18*60%*1/3)	$                      3.60
Total Avoidable Product cost	$                    62.80
Less:Purchase cost of component	$                    50.00
Net advantage per unit	$                    12.80
No. of units	29227	units
Net advantage(29,227 units*$12.80)	$               3,74,106
So Option A is answer