Use the Following Data for the Next 2 Questions

question 40

Multiple Choice

Use the following data for the next 2 questions:
A manufacturer operating with excess capacity has been asked to fill a special order at $7.25 per unit. The regular price is $10 per unit. No other use of the currently idle capacity can be found. The manufacturer's usual variable costs per unit are $3.50 for direct materials, $2.00 for direct labor, $1.00 for variable overhead, and $0.50 for sales commission. No sales commission would be paid on this special order. The average fixed overhead cost per unit is $0.25.
-Each year Wright's Widgets buys 10,000 subcomponents that it needs in the production of its widgets from an outside supplier for $15 each. If Wright instead used its existing idle capacity to produce it in-house, the variable production costs would be $8 per unit and $3 of fixed production overhead would be allocated to each unit. Additionally, Wright would need to hire one quality control technician for $28,000 per year. The excess capacity that would be required is currently leased to another company for $25,000 per year. What is the advantage or disadvantage if Wright continues to buy the subcomponent from the outside supplier?

• A) $13,000 advantage
• B) $17,000 disadvantage
• C) $37,000 advantage
• D) $3,000 disadvantage

---

Definitions:

Straight-line Method

A technique for determining the depreciation of an asset that presumes the asset depreciates by a consistent amount annually throughout its expected lifespan.

Net Income

The amount of earnings left over for a business after it has paid out all expenses, including taxes, interest, and operating expenses.

Correcting Entry

An entry made in accounting records to correct a mistake made in a previous recording.

Subsidiary Ledger

A detailed ledger that contains the individual accounts related to a specific area, like accounts receivable or payable, which rolls up into the general ledger.