McGraw Company Uses 5,000 Units of Part X Each Year

question 16

Essay

McGraw Company uses 5,000 units of Part X each year as a component in the assembly of one of its products.The company is presently producing Part X internally at a total cost of $100,000,computed as follows:
An outside supplier has offered to provide Part X at a price of $18 per unit.If McGraw Company stops producing the part internally,one-third of the fixed manufacturing overhead would be eliminated.Assume that direct labor is a variable cost.
Required:
Prepare an analysis showing the annual financial advantage or disadvantage of accepting the outside supplier's offer.

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Definitions:

Unmyelinated C Fibres

Nerve fibers lacking a myelin sheath that are primarily involved in transmitting slow pain signals to the brain.

Pain Signals

Pain signals are neurological transmissions indicating harm or potential damage to the body, alerting the brain to discomfort or injury.

Sensory Adaptation

The process by which our senses adjust to different levels of stimulation, allowing us to notice changes in the environment more than constant stimuli.

Odour

A distinctive smell, especially an unpleasant one, perceived by the olfactory nerve system.