Gottshall Inc

question 52

Essay

Gottshall Inc.makes a range of products.The company's predetermined overhead rate is $19 per direct labor-hour,which was calculated using the following budgeted data:
Component P0 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:
An outside supplier has offered to supply component P0 for $78 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.Gottshall chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?

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Definitions:

Buyer

An individual or organization that purchases goods or services.

Use

The application or operation of something for its intended purpose or function.

Black Box

In technology and psychology, a system or process whose internal workings are not visible or understood but can be observed by its inputs and outputs.

Internalize

The process of integrating beliefs, values, standards, or behaviors within oneself without external influence.