Answer: Financial disadvantage of -$863,000
Explanation:
If they made the 87 thousand units themselves, they would incur a cost of:
= 87,000 * (Direct labor + Direct materials + Variable manufacturing overhead) + Traceable fixed manufacturing overhead
= 87,000 * (23 + 24 + 22) + (23 * 110,000)
= 87,000 * 69 + 2,530,000
= $8,533,000
Traceable fixed costs are based on the total capacity of 110,000 units being produced and so will not change.
If they buy from the supplier, the cost would be:
= 108 * 87,000
= $9,396,000
Financial advantage (disadvantage) = 8,533,000 - 9,396,000
= -$863,000
