Gargoyle Corporation manufactures 20,000 widgets each period. The widget is used

Question

Gargoyle Corporation manufactures 20,000 widgets each period. The widget is used as an input for producing several other products that Gargoyle manufactures. The full manufacturing costs for a batch of 100 widgets are as follows:

Direct materials $ 540
Direct labor 400
Variable manufacturing overhead 400
Average fixed manufacturing overhead 700
Total $2,040

The fixed manufacturing overhead is comprised of depreciation expenses related to prior investments in facilities and equipment that are used in the manufacturing of the widgets. These assets have no other use than for the manufacturing of the widgets. An outside supplier has offered to sell Gargoyle the 20,000 widgets necessary to meet production needs this period for a lump-sum of $150,000. What should Gargoyle do if it wants to maximize its profit for the period?

Explanation / Answer

Costs of 100 widgets = 540 + 400 + 400 + 700 = 2,040 Costs of 20,000 widgets {100widgets*200} = 540*200 + 400*200 + 400 + 700 = 189,100 Option 1: manufacture widgets for 189,100 Option 2: buy widgets to outsider supplier for 150,000 *Decision: Gargoyle should buy the widgets to the outsider supplier, in order to maximize profits, because this would represent a decrease in costs of 39,100. (189,100 - 150,000 = 39,100)

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