Direct Materials Mohave Corp. is considering outsourcing production of the umbre
ID: 2417121 • Letter: D
Question
Direct Materials
Mohave Corp. is considering outsourcing production of the umbrella tote bag included with some of its products. The company has received a bid from Willow Co. to produce 9,700 units per year for $8.5 each. Mohave has the following information about its own production of the tote bags. (See above Table)
Mohave has determined that all variable costs could be eliminated by dropping production of the tote bags, while 75 percent of the fixed overhead cost is unavoidable. At this time, Mohave has no specific use in mind for the space currently dedicated to producing the tote bags.
1) Compute the difference in cost between making and buying the umbrella tote bag.
Differential Cost of Making vs. Buying: ___________,______________
2)Should Mohave buy the tote bags from Willow or continue to make them?
3-a) Suppose that the space Mohave currently uses to make the bags could be utilized by a new product line that would generate $12,000 in annual profits. Recompute the difference in cost between making and buying the umbrella tote bag.
Differential Cost of Making vs. Buying: _____________,_____________
3-b) Does this change your recommendation to Mohave?
Direct Materials
$4 Direct Labor $2 Variable Manufacturing Overhead $1 Fixed Manufacturing Overhead $2 TOTAL COST PER UNIT $9Explanation / Answer
Answer:1)
Answer:2) Mohave should continue to make them because making cost is less than buying cost.
Answer:3-a)
Answer:3-b) Yes,Mohave should buy the tote bags from Willo because making cost is higher than buying cost.
Particulars Make costs Direct material 38800 Direct labor 19400 Variable manufacturing overhead 9700 Fixed manufacturing overhead 19400 Total costs 87300 Particulars Buy cost unit price 82450 Unavoidable fixed overhead 14550 Total cost to buy 97000 Differentia cost of making vs. buying -9700Related Questions
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