Question 2 (2.5 points) The Cowboy\'s Company needs 20,000 units of a certain pa
ID: 2470387 • Letter: Q
Question
Question 2 (2.5 points)
The Cowboy's Company needs 20,000 units of a certain part to use in its production cycle. Cowboys is considering the possibility of buying the part from Dolphins Company instead of making it. Sixty percent of the fixed overhead will remain regardless of the decision made. Accounting records indicate the following data:
Cost to Cowboys to make the part:
Direct materials, $4
Direct labor, $16
Variable factory overhead, $18
Fixed factory overhead, $10
Cost to buy the part for Dolphins Company, $36
Which decision should Cowboys make & what is the total cost savings that would result?
Question 2 options:
Buy, $80,000
Make, $120,000
Make, $80,000
Buy, $120,000
Buy, $80,000
Make, $120,000
Make, $80,000
Buy, $120,000
Explanation / Answer
Variable cost
Direct material $ 4
Direct labor $16
Variable factory overhead $ 18
Fixed factory over head $ 10
Total cost $ 48
Total cost of making = 20,000 x 48 = $ 960,000
2. Cost of buying
Cost of purchasing = 36 x 20,000 = $ 720,000
Unavoidable fixed cost = 10 x 20,000 x 60 % = $ 120,000
Total cost = $ 840,000
Total saving =$960,000-$840,000
=$120,000
Answer option: 4
Buy $ 120,000
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