Barry IncMakes a Range of Products Component ZZ9 Is Used in One of the Company's Products

question 75

Essay

Barry Inc.makes a range of products.The company's predetermined overhead rate is $14 per direct labor-hour,which was calculated using the following budgeted data:
$$\begin{array} { | l | r | } \hline \text { Variable manufacturing overhead } & \$ 100,000 \\\hline \text { Fixed manufacturing overhead } & \$ 250,000 \\\hline \text { Direct labor-hours } & 25,000 \\\hline\end{array}$$
Component ZZ9 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:
$$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 28.00 \\\hline \text { Direct labor } & 56.00 \\\hline \text { Manufacturing overhead applied } & \underline { 39.20} \\\hline \text { Unit product cost } & \$ 123.20 \\\hline\end{array}$$
An outside supplier has offered to supply component ZZ9 for $108 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.Barry chronically has idle capacity.(CIMA adapted)
Required:
Is the offer from the outside supplier financially attractive? Why?

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Definitions:

Central Tendency

A statistical measure that identifies a single value as representative of an entire distribution of data, commonly the mean, median, or mode.

Standard Deviation

A measure of the amount of variation or dispersion of a set of values, indicating how much the values in a data set differ from the mean.

Computing Mean

The process of calculating the average value of a set of numbers by adding them together and dividing by the quantity of numbers.

ΣX / N

The formula for calculating the mean of a set of data, where ΣX is the sum of all data points and N is the number of data points.