Barry IncMakes 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:
$$\begin{array} { | l | r | } \hline \text { Variable manufacturing overhead } & \$ 100,000 \\\hline \text { Fixed manufacturing overhead } & \$ 250,000 \\\hline \text { Direct labor-hours } & 25,000 \\\hline\end{array}$$
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:
$$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 28.00 \\\hline \text { Direct labor } & 56.00 \\\hline \text { Manufacturing overhead applied } & \underline { 39.20} \\\hline \text { Unit product cost } & \$ 123.20 \\\hline\end{array}$$
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?