NG, Ltd Currently Buys 9,000 Subcomponents from an Outside Supplier at at $10

N.G., Ltd. currently buys 9,000 subcomponents from an outside supplier at $10 each. The company has excess capacity, which it sublets to another company for $20,000 per year. If the company were to use the idle capacity to produce the subcomponent internally, it would incur variable production costs of $6 per unit, and it would hire a new supervisor for $15,000 per year. Other fixed overhead costs would not change, but the average overhead cost per subcomponent unit would be $2. What is the advantage or disadvantage (in dollars) if N.G. makes the subcomponent instead of continuing to buy outside and subletting the excess capacity?

A) $6,000 disadvantage
B) $21,000 disadvantage
C) $1,000 advantage
D) $21,000 advantage

Correct Answer:

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