Mohave Corp. is considering outsourcing production of the umbrella tote bag incl

Question

Mohave Corp. is considering outsourcing production of the umbrella tote bag included with some of its products. The company has received a bid from Willow Co. to produce 8,400 units per year for $7 each. Mohave has the following information about its own production of the tote bags:

        

   

Mohave has determined that all variable costs could be eliminated by dropping production of the tote bags, while 60 percent of the fixed overhead cost is unavoidable. At this time, Mohave has no specific use in mind for the space currently dedicated to producing the tote bags.

   

Compute the difference in cost between making and buying the umbrella tote bag.

   

   

Suppose that the space Mohave currently uses to make the bags could be utilized by a new product line that would generate $12,000 in annual profits. Recompute the difference in cost between making and buying the umbrella tote bag.

     

  Direct materials $3        Direct labor 2        Variable manufacturing overhead 1        Fixed manufacturing overhead 1.5            Total cost per unit $7.5     

Explanation / Answer

Answer:1 Calculation of the difference in cost between making and buying the umbrella tote bag:

Difference in cost=Buying cost-Making cost

=66360-63000=3360

Answer:2 Make

Answer:3 -a

Difference in cost=Buying cost-Make cost

=54360-63000=8640

Answer:3-b Buy

Particulars Make cost Direct Material 25200 Direct Labor 16800 Variable manufacturing overhead 8400 Fixed manufacturing overhead 12600 Total cost 63000 Particulars Buy cost Unit Price (8400*$7) 58800 Unavoidable fixed overhead (12600*60%) 7560 Total cost 66360

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