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 a supplier in Vietnam to produce 10,000 units per year for $7.00 each. Mohave has the following information about the cost of producing tote bags: Direct materials $ 3 Direct labor 2 Variable manufacturing overhead 1 Fixed manufacturing overhead 2.50 Total cost per unit $ 8.50 Mohave has determined that all variable costs could be eliminated by outsourcing the tote bags, while 75 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.

Mohave Corp is considering outsourcing production of the umbrella tote bag included with some of its products. The company has received a bid from a supplier in Vietnam to produce 10,000 units per year for S7.00 each. Mohave has the tollowing information about the cost of producing tote bags Direct materials Direct labor ariable manufacturing overhead 2.50 8.50 Fixed manufacturing overhead Total cost per unit Mohave has detemined that all variable costs could be eliminated by outsourcing the tote bags, while 75 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 Required: 1. Compute the difference in cost between making and buying the umbrela tote bag. Cost of Versus 2Should Mohave buy the tote bags or continue to make them? OBuy Make 3-a. Suppose that the space Mohave currently uses to make the bags could be utilized by anew product line that would generate $6,000 in annual profits. Recompute the difference in cost between making and buying the umbrelle tote bag. Diferentil Cost of Making Versus Buying

Explanation / Answer

1) Differential cost :

2) Make

3a) Differential cost :

3b) yes

Make Buy Direct material 30000 Direct labour 20000 Variable overhead 10000 Fixed overhead 6250 Purchase cost 70000 Total 66250 70000

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