Financial Advantage of Buying Electronic Circuits from Outsourced Supplier
What is the financial advantage of buying 21,000 electronic circuits from the outside supplier for Diehl Corporation?
a. $80,000.
b. $132,000.
c. $112,000.
d. $96,000.
Answer:
The financial advantage of buying 21,000 electronic circuits from the outside supplier for Diehl Corporation is $112,000.
Diehl Corporation manufactures various parts for its products, including electronic circuits. The company sells 16,000 units of its product per year. An outside supplier has offered to sell electronic circuits to the company for $35 per unit.
To evaluate this offer, Diehl Corporation calculated the cost of producing the electronic circuits internally. The total cost of producing the electronic circuits internally is $640,000 per year. If the company purchases the electronic circuits from the outside supplier, there would be financial advantages to consider.
The financial advantage of buying 21,000 electronic circuits from the outside supplier would be calculated as follows:
- Previous cost = $640,000
- Less: Purchases 16,000 x $35 = $560,000
- Add: Additional benefit = $16,000
- Less: Fixed cost = $96,000
- Less: Depreciation = 2/3 x $48,000 = $32,000
By subtracting the cost savings and additional benefits from the previous cost, we arrive at the financial advantage of $112,000 by buying 21,000 electronic circuits from the outside supplier.