Question

Lakeside Inc. produces a product that currently sells for $68.40 per unit. Current production costs per unit include direct materials, $19; direct labor, $21; variable overhead, $9.50; and fixed overhead, $9.50. Product engineering has determined that a certain part of the product conversion process could be outsourced. Raw material costs would not be affected, but direct labor and variable overhead costs would be reduced by 30%. No other opportunity is currently feasible for unused production capacity.

Required: a. What would be the net cost advantage or disadvantage if Lakeview decided to outsource part of the conversion process at a cost of $7.60 per unit? (Round your final answer to 2 decimal places.)

Answer 1

Saving in direct labor cost (21 x 30%)	6.30
Saving in variable overhead cost (9.50 x 30%)	2.85
Cost of outsourcing	- 7.60
Net cost advantage of outsourcing	$1.55

Net cost advantage of outsourcing = $1.55

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