Reference no: EM132535864

Diehl Corporation manufactures a variety of parts for use in its product. The company has always produced all of the necessary parts for its product, including all of the electronic circuits. The company sells 21,000 units of its product per year. An outside supplier has offered to sell electronic circuits to the company for a cost of $39 per unit.

To evaluate this offer, the company has gathered the following information relating to its own cost of producing the electronic circuits internally:

Per Unit                                 21,000 units per year

Direct Material                               18                      378,000

Direct Labor                                    11                   231,000

Variable Manufacturing Overheard           3                 63,000

Fixed MO, Traceable                         3                     63,000

Fixed MO, allocated                             6                      126,000

total Cost                                        41                        861,000

• One-third supervisory salary; two-thirds depreciation of special equipment (no resale value).

Question 1: Suppose that if the electronic circuits were purchased, the division supervisor position could be eliminated. Fixed manufacturing overhead will be allocated to other products made by the company. Also, the company could use the freed production capacity to launch a new product. The segment margin of the new product would be $210,000 per year. Given this new assumption, how much would be the financial advantage of buying 21,000 electronic circuits from the outside supplier?