Question

Crane Company manufactures widgets. Bowden Company has approached Crane with a proposal to sell the company widgets at a price of $65600 for 100000 units. Crane is currently making these components in its own factory. The following costs are associated with this part of the process when 100000 units are produced: $ 24800 23200 Direct material Direct labor Manufacturing overhead Total 32000 $80000 The manufacturing overhead consists of $12800 of costs that will be eliminated if the components are no longer produced by Crane. From Crane's point of view, how much is the incremental cost or savings if the widgets are bought instead of made? $14400 incremental savings $1600 incremental savings $14400 incremental cost $4800 incremental cost

Answer 1

Savings = Avoidable cost of making – cost of buying

= 24800+23200+12800-65600

= -$4800

I.e. $4800 incremental cost

Savings = Avoidable cost of making – cost of buying

= 34100+31900+17600-90200

=-$6600

i.e. $6600 incremental cost

The products whose present sales value + additional cost of processing exceeds Sales value after processing should not be processed further

Hence, Product B should not be processed further

Joint cost = $17000

Traditional Rate = Total overheads/total labor hours

= 3,762,500/100,000

= $37.625

i.e. $38