Question

Olive Corp. currently makes 20,000 subcomponents a year in one of its factories. The unit costs to produce are: Per unit $ 12 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total unit cost 0000 40 An outside supplier has offered to provide Olive Corp. with the 20,000 subcomponents at a $36 per unit price. Fixed overhead is not avoidable. If Olive Corp. accepts the outside offer, what will be the effect on short-term profits? $160,000 decrease $320,000 increase $160,000 increase $80,000 decrease

Answer 1

Correct answer---------$80,000 decrease

Working

Total Cost of Buying	$ 720,000
Total Cost of manufacturing	$ 640,000
Financial Disadvantage of accepting offer	$ 80,000

.

Differential Analysis
	Make	Buy
Direct material	$ 240,000
Direct labor	$ 160,000
Variable Overheads	$ 240,000
Purchase price		$ 720,000
Total relevant Cost	$ 640,000	$ 720,000

.Fixed overhead are unavoidable hence not considered above.