Question

Reuben's Dell currently makes rolls for deli sandwiches it produces. It uses 26,000 rolls annually in the production of deli sandwiches. The costs to make the rolls are: Materials $0.24 per roll Labor Variable overhead 0.40 per roll 0.15 per roll 0.20 per roll Fixed overhead A potential supplier has offered to sell Reuben the rolls for $0.89 each. If the rolls are purchased, 30% of the fixed overhead could be avoided. If Reuben accepts the offer, what will the effect on profit be? Reuben would see a $ -260 x decline in profit if he buys the rolls.

Answer 1

Presently the total cost to make the rolls

= 0.24 + 0.40 + 0.15 + 0.20

= $ 0.99

Potential seller is selling Reuben @ $ 0.89 , but by accepting the offer only 30% of the fixed overhead will be reduced the remaining 70% fixed overhead will still be liable and is to be included in the cost.

Therefore remaining fixed overhead = 0.20*70% = 0.14

Total cost if Reuben accept the offer = 0.89+ 0.14 = 1.03

Therefore accepting the offer on the potential supplier will increase the cost by 0.04 then for reducing the profit by 26,000*0.04 = $1,040

Therefore the answer is reducing in profit by $1,040

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