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 9,900 units per year for $10.00 each. Mohave has the following information about the cost of producing tote bags:        

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.

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?

3-a. Suppose that the space Mohave currently uses to make the bags could be utilized by a new product line that would generate $6,000 in annual profits. Recompute the difference in cost between making and buying the umbrella tote bag.

Direct materials $ 6 Direct labor 2 Variable manufacturing overhead 1 Fixed manufacturing overhead 2.00 Total cost per unit $ 11.00

Explanation / Answer

Per unit Total Make Buy Make Buy Direct materials 6 59400 Direct labor 2 19800 Variable manufacturing overhead 1 9900 Fixed manufacturing overhead 0.5 4950 Purchase cost 10 99000 Total cost 94050 99000 Difference in cost between making and buying is $4950(99000-94050) favors making 2 Make 3 Difference in cost between making and buying is $1050(6000-4950) favors buying

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