Melbourne Corporation has traditionally made a subcomponent of its major product
ID: 2581067 • Letter: M
Question
Melbourne Corporation has traditionally made a subcomponent of its major product. Annual production of 30,000 subcomponents results in the following costs: Direct materials $ 250,000 Direct labor $ 200,000 Variable manufacturing overhead $ 190,000 Fixed manufacturing overhead $ 120,000 Melbourne has received an offer from an outside supplier who is willing to provide the 30,000 units of the subcomponent each year at a price of $28 per unit. Melbourne knows that the facilities now being used to manufacture the subcomponent could be rented to another company for $80,000 per year if the subcomponent were purchased from the outside supplier. There would be no effect of this decision on the total fixed manufacturing overhead of the company. Assume that direct labor is a variable cost. If Melbourne decides to purchase the subcomponent from the outside supplier, the annual financial advantage (disadvantage) would be: $120,000 $20,000 ($120,000) ($20,000)
Explanation / Answer
Cost of making: Direct materials 250000 Direct labor 200000 Variable manufacturing overhead 190000 Opportunity cost 80000 Total Cost of making 720000 Cost of buying 840000 Financial advantage (disadvantage) -120000 Option 3 is correct