The Cornell Milling Company manufactures an intermediate product identified as W

Question

The Cornell Milling Company manufactures an intermediate product identified as W1. Variable manufacturing costs per unit of W1 are as follows: Direct materials $ 5 Direct labor $15 Variable manufacturing overhead $10 Ithaca Tools has offered to sell Cornell Milling 10,000 units of W1 for $40 per unit. If Cornell Milling accepts the offer, $50,000 of fixed manufacturing overhead will be eliminated. Applying differential analysis to the situation, Cornell Milling should: Buy W1; the savings is $100,000 Buy W1; the savings is $50,000 Make W1; the savings is $100,000 Make W1; the savings is $50,000

Explanation / Answer

If Cornell Milling Company manufactures the product , total cost = Varaible cost +Fixed Cost

Variable COst = 10000x5+10000x15+10000x10 = 50000+150000+100000 = $300000

Fixed Cost = $50000

Total cost of manufacturing the product = 300000+50000 = $350000

If Cornell Milling Company buys the product , total cost = 10000x40 = $400000

So if the Company manufactures the product , it can save 400000 - 350000 = $50000

So , the Company should make W1, the savings is $50000

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