Russell Company currently manufactures glass turntable trays (carousels) for its main product, microwave ovens. The costs for one turntable is as follows:
|
Direct materials |
$ 3.00 |
|
Direct labor |
$ 18.00 |
|
Variable overhead |
$ 6.00 |
|
Average fixed overhead |
$ 30.00 |
|
Total production cost |
$ 57.00 |
Stover Corp., a maker of glass cooking pans, has contacted Russell
with an offer to outsource 3,000 turntables for $52.00 each.
Russell would eliminate $66,000 of fixed overhead if it accepts the
proposal and buys the turntables from Stover. Should Russell make
or buy the turntables? What is the dollar impact on Russell's
profits?
Solution:
| Differential Analysis- Russell Company - Making Turntables (alt 1) or Buying Turntables (Alt2) | |||
| Particulars | Making Turntables (Alt 1) | Buying Turntables (Alt 2) | Financial advantage (Disadvantage) of buying (Alternative 2) |
| Costs: | |||
| Purchase Price (3000*$52) | $0.00 | $156,000.00 | -$156,000.00 |
| Direct material | $9,000.00 | $0.00 | $9,000.00 |
| Direct Labor | $54,000.00 | $0.00 | $54,000.00 |
| Variable overhead | $18,000.00 | $0.00 | $18,000.00 |
| Avoidable Fixed Overhead | $66,000.00 | $0.00 | $66,000.00 |
| Total Cost | $147,000.00 | $156,000.00 | -$9,000.00 |
Russell should make the turntables.
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