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 8,200 units per year for $9.50 each. Mohave has the following information about the cost of producing tote bags: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead 2 2.00 $10.00 Total cost per unit Mohave has determined that all variable costs could be eliminated by outsourcing 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. Required 1. Compute the difference in cost between making and buying the umbrella tote bag ential Cost of Making Versus Buying 2. Should Mohave buy the tote bags or continue to make them? Buy Make

Explanation / Answer

1) Differential cost :

Differential cost of making versus buying 5740

2) Mohave should make the tote bags.

Make Buy Direct material 41000 Direct labour 16400 Variable manufacturing overhead 8200 Fixed manufacturing overhead (8200*2*40%) 6560 Purchase cost (8200*9.5) 77900 Total differential cost 72160 77900

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