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and learning resource from Cengage Learning Google Chrome gnmentMain.do?invoker Locator-assignment-take&inprogress; false eBook Fresh Foods, a large restaurant chain, needed to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each. Cost information on internal production indludes the following Video . Total Unit Cost Cost $25,000 $5.00 15,000 3.00 ,500 1.50 1,000 2.20 0,000 6.00 $88,500 $17.70 Direct materials Direct labor variable manufacturing overhead Variable marketing overhead Flixed plant overhead Total Fixed overhead will contioue whether the ingredient is produced internaly or externallx. No aditional costs of purchasing wll be incurred bevond the purchase price. If required, round your answers to the nearest whole number Required: 1. What are the alternatives for Fresh Foods? Make the ingredient in bouse or buy it externally. 2. Which aiternative is more cost effective and by how much? (Use total cost when glving your answer) Make v 3. Now asume that 40% of the nsed overhead can be ,voided a the ingredient i, purchased eternal, which alternanve is mor. east 8 0Explanation / Answer
Answer 1
Alternatives for Fresh Foods are to buy the main food ingredient or to make it in-house.
Answer 2
Make alfernative is more cost effective
Cost of purchase - $ 12
Cost of in-housing making $11.70 (direct material + direct labour +variable manufacturing overhead + variable selling overhead)
As visible, inhouse cost is less than purchase cost by $ 0.30
Note: Since fixed overhead will continue, it is irrelevant for the purpose of decision making.
Answer 3
Cost of inhouse manufacture would be as under:
40% of total fixed cost is avoidable and hence relevant foe the purpose of decision making.
So, cost per unit of inhouse manufacture - $ 14.10
Cost of purchase - $ 12
As visible, puchase option is more beneficial and cost effective by $ 2.10
Expense Total cost Per unit cost Direct Material $ 25,000 $ 5.00 Direct Labour $ 15,000 $ 3.00 Variable manufacturing overhead $ 7,500 $ 1.50 Variable selling overhead $11,000 $ 2.20 Fixed overhead(40% of $30,000) $12,000 $ 2.40 $ 14.10Related Questions
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