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

question 128

Essay

Lindon 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 $80,000 as follows: An outside supplier has offered to provide Part X at a price of $13 per unit. If Lindon Company stops producing the part internally, one-third of the fixed manufacturing overhead would be eliminated.
Required:
Prepare an analysis showing the annual advantage or disadvantage of accepting the outside supplier's offer.

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Definitions:

Prices Change

The variation in the cost of goods and services over time, which can be influenced by factors like supply and demand, inflation, and market competition.

Inferior Good

An inferior good is one whose demand decreases as the income of the consumer increases, inversely related to income.

Price Decrease

A reduction in the cost of a good or service, which usually leads to an increase in the quantity demanded by consumers.

Allowance

An amount of money given regularly for a specific purpose, often by a parent to a child or by an employer to an employee.