Question 8 Calc, Inc. owns a machine that produces baskets for the gift packages

ID: 2396468 • Letter: Q

Question

Question 8 Calc, Inc. owns a machine that produces baskets for the gift packages the company sells. The company uses 900 baskets in production each month. The costs of making one basket is $4 for direct materials, $3 for variable manufacturing overhead, $2 for direct labor, and $5 for fixed manufacturing overhead. The unit cost is based on the monthly production of 900 baskets. The company determined that 30%of the foed manufacturing overhead is avoidable. An outside supplier supply all the units it needs. Prepare on naremental snab sis to determine f Gale shouid buy the baskets from the suppier Enter negative amounts using either a negative sign preceding the number e.g. 45 or parentheses e.g. (45).) 10800 Incremental cost to buy is question: Deen Show Wonk Incremental savings on fixed overhead Additional cost to buy Incremental cost to buy Incremental savings on variable overhead Incremental savings on direct materials Incremental savings on direct labor Question Attempts: 0 of 1 used SAVE FOR LATER SUBMIT ANSWER

Explanation / Answer

TO make

To buy

Cost of purchase@ $13 per basket = (900 X $13 )

$11,700

Direct materials@ $4 per basket = (900 X $4)

$3,600

Direct labor@ $2 per basket = (900 X $2)

$1,800

Overhead :

Variable manufacturing overhead@ $3 = 900 X $3 = $2,700

Fixed manufacturing overhead @ $1.5 = 900 X $1.5* = $1,350

Total overhead cost = $4050

$4,050

Total cost

$9,450

$11,700

Note*:

Only avoidable costs shall take into consideration in incremental analysis and sunk cost & fixed costs which are unavoidable shall not take into consideration while making decisions like above.

Fixed manufacturing overhead per basket = $5 X 30% = $1.5 per basket.

Conclusion:

Since the cost of purchasing of basket is higher than the cost of manufacturing the basket, it is advisable to continue with the manufacturing of baskets.

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