Three stars inc, manufactures prefabricated houses. The firm\'s president, Miche
ID: 2485288 • Letter: T
Question
Three stars inc, manufactures prefabricated houses. The firm's president, Michelle Brown, is interested in determining whether it would be better to manufacture the doors used in the houses or to buy them from a supplier. The following information, based on production of 500 doors has been gathered to help determine the best option: Of the fixed overhead costs. Three Stars estimates that it could save $5 per unit of miscellaneous fixed overhead if it purchases the doors from a supplier and allocates all other fixed costs elsewhere. The cost to purchase 500 doors would be $55,000. Required: On the basis of a short-run financial analysis. Should Three Stars make or purchase doors? Show calculations to support your answer.Explanation / Answer
Fixed Overhead to be incurred whether door is produced or not Qty per unit Amount Administrative Salaries 500 7.00 3,500 Property Taxes 500 2.00 1,000 Insaurance 500 5.00 2,500 Utilities 500 5.00 2,500 Miscellanous Fixed Overhead 500 6.00 3,000 Total Fixed Overhead Cost 12,500 Fixed Cost can be Saved from Not Production of Doors 500 5.00 2500 Fixed Cost to be incurred whether door is produced or not 10,000 Cost of Purchasing of Doors 500 110 55,000 Cost of Manufactring of Door Variable Qty per unit Amount Direct Material 500 35 17,500 Direct Labour 500 50 25,000 Variable overhead 500 10 5,000 Fixed Cost can be avoided 500 5 2,500 50,000 Saving in Production 5,000 IT is advisable that three star should make the door instead of purchasing from outside, as it is good for three star to recover its fixed cost by $ 5000.
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