Mohave Corp. is considering outsourcing production of the umbrella tote bag incl

Question

Mohave Corp. is considering outsourcing production of the umbrella tote bag included with some of its products. The company has received a bid from a supplier in Vietnam to produce 9,900 units per year for $10.00 each. Mohave has the following information about the cost of producing tote bags:        

Mohave has determined that all variable costs could be eliminated by outsourcing 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.

2. Should Mohave buy the tote bags 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 $6,000 in annual profits. Recompute the difference in cost between making and buying the umbrella tote bag.

3-b. Does this change your recommendation to Mohave?

Direct materials $ 6 Direct labor 2 Variable manufacturing overhead 1 Fixed manufacturing overhead 2.00 Total cost per unit $ 11.00

Explanation / Answer

Ans 1 Relevant cost to make Direct materials 6 Direct labor 2 Variable manufacturing overhead 1 Fixed manufacturing overhead (2*25%) 0.5 Total Relevant cost per unit 9.5 Cost to buy $10 Differentail cost is $.5 less to make than buy Ans 2 Should make them As $.5 is less to make it. Ans 3 Relevant cost to make 9.5 Cost to buy 9.39 10-(6000/9900) Differential cost is (9.5-9.39)= $.11 which is more to make than buy ans 3 Now Mohave should buy

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.