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 9,400 units per year for $8.00 each. Mohave has the following information about the cost of producing tote bags: $5.ee 1.09 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 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-. 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 2 Reg 1 Reg 3A Req 3B Compute the difference in cost between making and buying the umbrella tote bag. Differential Cost of Making Versus Buying Reg 2 >

Answer 1

1)

	Make	Buy
Direct materials (9400*$5)	$47000
Direct labor (9400*$1)	9400
Variable manufacturing overhead (9400*$1)	9400
Avoidable fixed manufacturing overhead ($2*30%*9400)	5640
Purchase price (9400*$8)		$75200
Total relevant costs	$71440	$75200

Differential cost of making versus buying= $3760 Making ($75200-71440)

2) Mohave should continue to make the tote bags as the total relevant cost of making is less than the total relevant cost of buying the tote bags.

3-a)

	Make	Buy
Direct materials (9400*$5)	$47000
Direct labor (9400*$1)	9400
Variable manufacturing overhead (9400*$1)	9400
Avoidable fixed manufacturing overhead ($2*30%*9400)	5640
Opportunity costs	6000
Purchase price (9400*$8)		$75200
Total relevant costs	$77440	$75200

Differential cost of making versus buying= $2240 Buying ($77440-75200)

b) Mohave should buy the tote bags as the total relevant cost of buying is less than the total relevant cost of making the tote bags.