Wood Chuck Furniture currently manufactures rocking chairs as its main product.

Question

Wood Chuck Furniture currently manufactures rocking chairs as its main product. Each chair uses one seat cushion and one back cushion with the following costs per set of cushions (one seat and one back):

Shepert Company has contacted Wood Chuck with an offer to sell it 5,000 sets of cushions for $18 each. If Wood Chuck buys the cushions, $2 of the fixed overhead per unit will be allocated to other products.

Should Wood Chuck make or buy the cushions?

Answer:

Direct materials $ 1 Direct labor 10 Variable overhead 5 Fixed overhead 8 Total $ 24

Explanation / Answer

Differential analysis :

Wood Chuck should buy to save $4 per set

Make Buy Direct material 5000 Direct labour 50000 Variable overhead 25000 Fixed overhead (5000*6) 30000 Purchase cost (5000*18) 90000 Total relevant cost 110000 90000

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