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 8,900 units per year for $7.50 each. Mohave has the following information about the cost of producing tote bags: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead 2.00 Total cost per unit $8.00 Mohave has determined that all variable costs could be eliminated by outsourcing the tote bags, while 70 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. 2. Should Mohave buy the tote bags or continue to make them? Buy Make

Explanation / Answer

Therefore Mohave should make the tote bags as it is cheaper.

b)

In this case , Mahove should buy the tote bags and use the space for the new product line.

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Costs of making Direct materials 4 Direct labour 1 Var mfg OH 1 Total Variable cost per unit 6 No of units 8,900 Total Variable cost 53,400 Avoidable fixed cost (2X8900X30%) 5340 TOTAL INCREMENTAL COST OF MAKING 58,740 COST OF PURCHASE 66750 DIFFERENCE -8010

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