McGraw Company Uses 5,000 Units of Part X Each Year

Essay

McGraw Company uses 5,000 units of Part X each year as a component in the assembly of one of its products.The company is presently producing Part X internally at a total cost of $100,000, computed as follows: An outside supplier has offered to provide Part X at a price of $18 per unit.If McGraw Company stops producing the part internally, one-third of the fixed manufacturing overhead would be eliminated.Assume that direct labor is a variable cost.

Required:
Prepare an analysis showing the annual financial advantage or disadvantage of accepting the outside supplier's offer.