Question

Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit 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. 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 $6,000 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. Reg Reg 2 Reg 3A Reg 3B < Prev 7 of 8 Next > to search

Answer 1

Difference in cost= Avoidable cost of making - cost of buying

= 9*9500 + 2*9500*25% - 9500*10

=-$4,750

2. Continue to make them, since the cost of making is lower

3.Difference in cost =6000-4750

=$1250

3b yes, should buy