Barry Inc Makes a Range of Products Component ZZ9 Is Used in One of the Company's Products

Essay

Barry Inc. makes a range of products. The company's predetermined overhead rate is $14 per direct labor-hour, which was calculated using the following budgeted data:
$\begin{array}{llr} \text { Variable manufacturing overhead } &\$100,000\\ \text { Fixed manufacturing overhead } &\$250,000\\ \text { Direct labor-hour's } &25,000\end{array}$

Component ZZ9 is used in one of the company's products. The unit cost of the component according to the company's cost accounting system is determined as follows:
$$\begin{array} { l r } \text { Direct materials } & \$ 28.00 \\\text { Direct labor } & 56.00 \\\text { Manufacturing overhead applied } & 39.20 \\\text { Unit product cost } & \$ 123.20\end{array}$$
An outside supplier has offered to supply component ZZ9 for $108 each. The outside supplier is known for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision. Barry chronically has idle capacity. (CIMA adapted)
Required:
Is the offer from the outside supplier financially attractive? Why?