Question

This information is only for packaging, not the cookies themselves:
	Total Cost for 100,000 Packages	Cost per package
Direct Materials	$75,000	$0.75
Direct Labor	$22,000	$0.22
Variable Factory Overhead	$52,000	$0.52
Fixed Factory Overhead	$70,000	$0.70
Total Costs	$219,000	$2.19
Another manufacturer offers to sell The Big Cookie Company the packages for $1.60 a package.
This would leave idle facilities for Big Cookie, but the accountants estimate $10,000 would be saved in costs related to the packaging machinery.
Should The Big Cookie Company allow its packages to be made by another manufacturer?
Thoroughly explain your answer.

Answer 1

Incremental Analysis
	Cost of Making	Cost of Buying	Increase/Decrease in Income
Direct materials	75,000	0	75,000
Direct labor	22,000	0	22,000
Variable factory overhead	52,000	0	52,000
Fixed factory overhead	70,000	60,000	10,000
Outside supplier price	0	160,000	-160,000
Total cost	$219,000	$220,000	-$1,000

Since cost of buying is $1,000 more than cost of making, hence the company should make the packages.

Net incremental advantage of making = $1,000

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