Allzine Ltd

question 172

Multiple Choice

Allzine Ltd. currently buys 19,000 subcomponents from an outside supplier at $15 each. The company has excess capacity, which it sublets to another company for $50,000 per year. If the company were to use the idle capacity to produce the subcomponent internally, it would incur variable production costs of $12 per unit, and it would hire a new supervisor for $30,000 per year. Other fixed overhead costs would not change, but the average overhead cost per subcomponent unit would be $2. What is the advantage or disadvantage (in dollars) if Allzine makes the subcomponent instead of continuing to buy outside and subletting the excess capacity?

• A) $77,000 advantage
• B) $15,000 disadvantage
• C) $23,000 advantage
• D) $61,000 disadvantage

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