Question

Mohave Corp. is considering outsourcing production of the umbrella tote bag included with some of its...

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:

Direct materials $6.00
Direct Labor 2.00
Variable manufacturing overhead 1.00
Fixed manufacturing overhead 2.00
Total cost per unit 11.00

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.

Required:
1.
Compute the difference in cost between making and buying the umbrella tote bag.
2. Based strictly on the incremental analysis, 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?

1. Differential cost of making versus buying

__________ Favors Buying vs Favors Making

2. Should Mohave buy the tote bags or continue to make them?

Make

Buy

3. 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.

Differential Cost of Making Versus Buying

___________

Favors buying vs favors making

4. Does this change your recommendation to Mohave?

Yes or No

Homework Answers

Answer #1

we will consider only 25% avoidable fixed OH . As 75% would remain same in both the situation (Make/Buy) it is not relevant.

Make Buy
Direct Material $59,400[$6*9,900]
Direct labor $19,800[$2*9,900]
Variable OH $9,900[$1*9,900]
Fixed OH $4,950[$2*9,900]*25%
cost of buying $99,000[9,900*$10]
Total cost $94,050 $99,000

2) company should make the bag as its cost is lesser than cost of buying by $4,950[$99,000-94,050]

3)

Make Buy
Manufacturing cost $94,050
Purchase cost $99,000
Opportunity cost of not making new product line bags $6,000
Total cost $100,050 $99,000

4) In this case cost of buying is lesser so it should be bought from outside.

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