1. Make or buy decision Banner Inc. makes wheels used in the production of child
ID: 2585305 • Letter: 1
Question
1. Make or buy decision Banner Inc. makes wheels used in the production of children's wagons. The cost of producing 20,000 wheels needed is $24,000, which includes variable costs of $13,000 and fixed costs of $11,000. An outside supplier has offered to sell Banner similar wheels for $1.00 per wheel. If the wheels are purchased from the outside supplier, Banner expects to avoid all the variable costs and S3,500 of the fixed costs. In addition, the facilities now being used to make the wheels would be rented to another company for $5,500 per year. If Banner chooses to buy the wheels from the outside supplier, its operating income will increase decrease (circle one) by $ 2. Special order Midway Company had the following results of operations for the past year: Per unit Total $10 Sales (16,000 units) Direct materials and direct labor Manufacturing overhead Selling and administrative expenses 160,000 96,000 16,000 32,000 A foreign company offers to buy 4,000 units of products at $7.50 per unit. Selling these units would increase manufacturing overhead by $3,200 and selling and administrative costs by $300 If Midway accepts this special order, what would be the impact on the company's profit? Ans: increase or decrease (Circle one)Explanation / Answer
1. Make or Buy Decision
If Banner chooses to buy the wheels from the outside supplier, its operating income will increase by $2,000 i.e. ($22,000 - $20,000)
2. Special Order
Midway Company should accept the order of 4,000 units because it will increase the company's overall profit by $2,500
Particulars Make Buy Purchase Cost ($1 x 20,000) $20,000 Variable Cost $13,000 Avoidable Fixed Cost $3,500 Opportunity Cost $5,500 Total Cost $22,000 $20,000Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.