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 8,300 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 overnead Fixed manufacturing overhead 1.50 $10.50 Total cost per unit Mohave has determined that all variable costs could be eliminated by autsourcing the tote bags, while 60 percent of the fixed overhead cost is unavoidable. At this time, Mohave has no specific use in mind for the space currently dedicated to praducing the tote bags. Required 1. Compute the difference in cost between making and buying the umbrella tote bag. Differential Cost of Versus Buying 2. Should Mohave buy the tote bags or continue to make them? Buy Make 3-a. Suppose that the space Mohave currentiy uses to make the bags could be utillzed by a new product line that would generate $10,000 In annual profits. Recompute the difterence in cost between making and buying the umbrella tote bag. Differential Cost of Versus

Answer 1

Answer for For 8,300 units Make per unit Amount Buy Amount Difference Amount (a) b) (a) x 8300 (a) x 8300 (d)(c) (b) Vietnam supplier offer $10.00 $ Direct Material Direct Labor Variable Mfg. Overhead $1.00 8,300 $ Fixed Mfg. Overhead Total costs $83,000 83,000 Higher $ (49,800) Lower S (16,600) Lower $ (8,300) Lower 12,450 S 7.470 S (4,980) Lower $10.50 S 87,150 S 90,470 $ 3,320 Higher $6.00 49,800 $2.00 $ 16,600 $ Fixed Mfg. overhead is$ 12,450 ( 8,300 units x$ 1.50) If Vietnam supplier's offer is accepted, Fixed Mfg. Overhead can be avoidable by 40% If offer accepted, Fixed Mfg. Overhed is $ 7,470 ( $12,450 x 60% ) is unavoidable Through accepting the offer Total costs are increased by $ 3,320 than Making Answer for 2 Through accepting the offer Total costs are increased by $ 3,320 than Making So offer can be reject & make them on our own So Answer is 2nd option - MAKE Answer for 3 For 8,300 units Make Buy Amoun Difference per unit Amount Amount Vietnam supplier offer $10.00 $ Direct Material Direct Labor Variable Mfg. Overhead $1.00 $ Fixed Mfg. Overhead Profits from New product Total costs $ 83,000 83,000 Higher S (49,800) Lower S (16,600) Lower $ (8,300) Lower 12,450 7,470(4,980) Lower (10,000) (10,000) Lower $10.50 $ 87,150 80,470 (6,680) Lower (a) (b)(a) x 8300 $6.00 49,800 $ 8,300 $2.00 $ 16,600 $ $ Fixed Mfg. overhead is $12,450 (8,300 units x$ 1.50) If Vietnam supplier's offer is accepted, Fixed Mfg. Overhead can be avoidable by 40% If offer accepted, Fixed Mtg. Overhed is $ 7,470 ( $12,450 x 60% ) is unavoidable Profit from New product i.e. S 10,000 is shown as negative as it reduces the costs Through accepting the offer Total costs are decreased by $ 6,680 than Making