Question

Hot Dog Express (HDE) is currently buying their buns from Buns-For-All for $. 50 a dozen. Each month they purchase 14,000 dozen. HDE is considering making their own buns for cost cutting and quality reasons. They have determined the following costs: materials, $. 20; direct labor, $. 10; variable factory overhead cost, $. 04; and total (existing) fixed costs, $3,000 per month. From an accounting point of view only, should HDE make or buy their buns?a.make; savings of $4,000b.make; savings of $2,240c.buy; savings of $2,240d.buy; savings of $760

Answer 1

Answer:

B) make ; savings of $2,240

Explanation:

Hot Dog Express's current costs:

14,000 dozens x $0.50 per dozen = $7,000

Incremental analysis of the alternative course of action:

total production 14,000 dozens of buns

direct materials $0.20 per dozen

direct labor $0.10

variable overhead $0.04

fixed costs $3,000 not to be accounted for since they already exist and will continue whether this alternative is taken or not.

total costs for alternative course = 14,000 dozens x ($0.20 + $0.10 + $0.04) = 14,000 dozens x $0.34 per dozen = $4,760

If HDE decides to take the alternative course (manufacture their own buns) they will save $2,240 (= $7,000 - $4,760)