Mohave Corp is considering outsourcing production of the umbrella tote bag inclu

Question

Mohave Corp is considering outsourcing production of the umbrella tote bag included with some of its products. The company has recelved a bid from a supplier in Vietnam to produce8,900 units per year for S7.50 each. Mohave has the folowing information about the cost of preducing tobe bags Variable manufacturing overhead Fixed manufacturing overhead Total cost Mohave has determined that all variable costs could be eliminated by outsourcing the tote bags, while 70 percent of the foced overhead cost is unavoldable. A this time, Mohave has no specific use in mind for the space currently dedicated to producing the tote begs Required 1. Compute the diference in cost between making and buying the umbrella Sote bag 2Should Mohave buy the tote bags or continue to make them? Buy a Suppose that the space M teve current y uses to make te begs could be utRaed by tote beg new product Ine thet oud generate S12.000 in 8n wa proms Roco pute the ?ne ence i cost between meki g end buying the umbrella

Explanation / Answer

Answer 1 a

Computation of difference in cost in making & buying the unbrella tote bags

Difference in cost of making versus buying = $8,010 increase

Answer 2

Make.

Explanation : Since cost of making is less than cost of buying by $8,010 , i is recommended to make umbrella tote bags.

Answer 3a

Computation of difference in cost in making & buying the unbrella tote bags

Difference in cost of making versus buying =  $3,990 decrease

Thus Mohace should Buy.

Explanation : Since cost of buying is less than cost of making by $3,990 , i is recommended to buy umbrella tote bags.

Particulars Cost of Making Cost of buying Direct Material ($4 * 8,900) 35,600 Direct labour ($1 * 8,900) 8,900 Variable overhead ($1 * 8,900) 8,900 Avoidable fixed costs ($2 * 8,900 * 30%) 5,340 Unavoidable fixed costs ($2 * 8,900 * 70 %) 12,460 12,460 Cost of making (A) $71,200 Buying cost ($7.50 * 8,900) 66,750 Total cost of buying (B) $79,210 Difference in cost [A-B] $8,010

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