Torii Inc. currrently manufactures 14,000 wooden boxes for their main product in

Question

Torii Inc. currrently manufactures 14,000 wooden boxes for their main product in a monthly basis.

Cost for each box is:

Direct materials = $12.00
Direct labor = $16.00
Variable overhead = $10.00
Fixed Overhead = $20.00
TOTAL = $58.00

An offer was made by the Yang company to buy 14,000 boxes for $54 each.
***$2 of the fixed overhead per unit is unavoidable.


1. Perform an incremental analysis for the make or buy decision

2. From a purely financial perspective, should Torii Inc. make or buy the boxes? Explain your answer.

Explanation / Answer

1. Total cost if decision is made to make = $58.00 Total cost if decision is made to purchase = $54 + $20.00- $2 = $72.00 Incremental cost of buying = $72.00 - $58.00 =$14 2. Torii Inc. should make because cost per unit is less when the wooden box is manufactured inhouse

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