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Make versus Buy for Bulan Inc

3. (TCO D) Bulan Inc. makes a range of products. The company's predetermined overhead rate is $20 per direct labor-hour, which was calculated using the following budgeted data:
Variable manufacturing overhead................. $140,000
Fixed manufacturing overhead..................... $560,000
Direct labor-hours....................................... 35,000
Component T6 is used in one of the company's products. The unit product cost of the component according to the company's cost accounting system is determined as follows:
Direct materials............................................. $ 45.00
Direct labor.................................................. 32.00
Manufacturing overhead applied.................... 40.00
Unit product cost.......................................... $117.00
An outside supplier has offered to supply component T6 for $101 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. Bulan chronically has idle capacity.
Required: Is the offer from the outside supplier financially attractive? Why?

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The solution explains how to evaluate a make or buy decision.

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