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 8,700 units per year for $10.00 each. Mohave has the following information about the cost of producing tote bags: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit $ 6.00 2.00 1.00 1.50 $10.50 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. Based strictly on the incremental analysis, 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 $12,000 in annual profits. Recompute the difference in cost between making and buying the umbrella tote bag. 3-b. Does this change your recommendation to Mohave? Complete this question by entering your answers in the tabs below. Req 1 Reg 2 Req 3A Req 3B Compute the difference in cost between making and buying the umbrella tote bag. Differential Cost of Making Versus Buying Favors Making

Answer 1

1
	Per unit		Total 8700 units
	Make	Buy	Make	Buy
Direct materials	6.00		52200
Direct labor	2.00		17400
Variable manufacturing overhead	1.00		8700
Fixed manufacturing overhead(avoidable)	0.45		3915
Purchase cost		10.00		87000
Total			82215	87000
Differential cost of Making Versus Buying	4785	Favors making	=87000-82215
2
Make, as cost of making is less
3a
	Make	Buy
Total cost	82215	87000
Opportunity cost	12000
Total relevant cost	94215	87000
Differential cost of Making Versus Buying	7215	Favors buying	=94215-87000
3b
Yes, now the recommendation is Buy