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resource from Cengage Leaming-Microsoft Edge tak Main.do invoker-assignments&takeAssignmentSessionl; ocator-assignment-take&inprogress; false Video Caloulator Structuring a Make-or Buy Problem Fresh Foods, a large restaurant chain, needed to determine i it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to parchase them from an outside supplier for $12 each. Cost information on internal production indludes the following Total Cost Unit Cost 5 5.00 Direct materials Direct labor Variable manufacturing overhead Varlable marketing overhead Fixed plant overhead 15,000 10,000 2.00 Total Find overhead w continue whether the ingredient is produced internaly or external. No additional costs of purchasing will be incurred beyond the purchase price Required: 1. What are the aternatives for Fresh Foods? 87,500 $17.50 Whilch alternative is more Hake the ingredient in house v By how much? 3. Now assume that 20% of the fixed overhead can be avoided the ingredient is purchased eternally, which alternative is more cost·ffective? By how much? All work saved.Explanation / Answer
1 - a calculation of total cost of making and buying the parts cost of making 1 2 3 particulars cost per unit total cost for 5000 units ( cost per unit * 5000 ) direct materials 5 25000 direct labor 3 15000 variable manufacturing overheads 1.5 7500 total 9.5 47500 cost of buying 12 60000 particulars make buy total relevant cost for 5000 units 47500 60000 note the fixed overheads are not relevant the variable marketing overheads are not relevant as the marketing expenses need not be incurred if the products are used for internal use 1 the two alternatives available are make and buy 2 the cost effective alternative is making internal , as the cost of making is less cost the cost effective of making is 12500 ( 60000 - 47500 ) 3 if the 20 % of the fixed cost can be avoided , then the avoided cost is relevant for decision making cost of making total cost + 20 % of fixed overheads 47500 + ( 30000 * 20 % ) 53500 cost of buying 60000 -6500 the cost effective alternative is making internal , as the cost of making is less cost the cost effective of making is 6000 ( 60000 - 53500 )
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