Direct materials 5 direct labor 15 Variable Overhead 10 Fixed Overhead 5 The hua

Question

                    Direct materials 5                 

                    direct labor 15                 

                    Variable Overhead 10                 

                    Fixed Overhead 5                 

                    The huang company has offered to sell 12000 components to dowdy for 37 each. If dowdy accepts the offer some of the facilities currently being used to                    manufacture the components can be rented as warehouse space for 40000.However, 3 of the Fixed overhead would have to be covered by dowdys other products in                    other words these fixed costs would not go away.                 

                    Ignoring all other qualittative issues, thus assuming dowdy was only concerned about profits answer the following.                 

                    Should the make or buy the product and                 

                    What is the cost difference between the two alternatives?

Explanation / Answer

Total cost when Dowdy makes the product= 12000*35 =$420000

Fixed cost unavoidable component = 3*12000= $36000

Total cost when Dowdy buys the product = 12000*37 +36000-40000 = 440000

Cost is higher if Dowdy buys the product

Dowdy should make the product

Cost difference= 440000-420000= $20000

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