The Southern Bell Company manufactures 2,000 telephones per year. The full manuf

Question

The Southern Bell Company manufactures 2,000 telephones per year. The full manufacturing costs per telephone are as follows:

Direct materials

$ 2

Direct labor

8

Variable manufacturing overhead

6

Average fixed manufacturing overhead

6

Total

$22

The Illinois Bell Company has offered to sell Southern Bell Company 2,000 telephones for $15 per unit. If Southern Bell Company accepts the offer, $10,000 of fixed overhead will be eliminated.  

Southern Bell should:

Select one:

A. Make the telephones; the savings is $2,000

B. Buy the telephones; the savings is $24,000

C. Make the telephones; the savings is $12,000

D. Buy the telephones; the savings is $12,000

Direct materials

$ 2

Direct labor

8

Variable manufacturing overhead

6

Average fixed manufacturing overhead

6

Total

$22

Explanation / Answer

Totla fixed costs=(6*2000)=$12000

Hence additional cost in buying =(12000-10000)=$2000

Total cost of making=(22*2000)=$44000

Total cost of buying=(2000*15)+2000=$32000

Hence Southern Bell should D. Buy the telephones; the savings is $12,000(44000-32000=$12000)

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