NG, Inc Currently Buys 9,000 Subcomponents from an Outside Supplier at at $10

question 28

Multiple Choice

N.G., Inc. currently buys 9,000 subcomponents from an outside supplier at $10 each. The company has excess capacity, which it sublets to another company for $20,000 per year. If the company were to use the idle capacity to produce the subcomponent internally, it would incur variable production costs of $6 per unit, and it would hire a new supervisor for $15,000 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 N.G. makes the subcomponent instead of continuing to buy outside and subletting the excess capacity?

• A) $6,000 disadvantage
• B) $21,000 disadvantage
• C) $1,000 advantage
• D) $21,000 advantage

---

Definitions:

Contribution Margin Ratio

The percentage of each sales dollar that contributes to covering fixed costs and generating profit.

Products

Goods or services that are created through a business process and offered in the market to satisfy the needs or wants of customers.

Predetermined Overhead Rate

This is a rate calculated before the accounting period begins, used to allocate manufacturing overhead costs to products.

Machine-Hours

A measure of the amount of time machinery is in operation, commonly used as a basis for allocating machine related costs to products.