Answer:
Fresh Foods
Make or Buy Decision:
1. Make the ingredient in-house.
2. Make in-house is more cost effective by $3,000 ($90,000 - 87,000)
3. If 40% of the fixed overhead can be avoided if the ingredient is purchased externally:
Total cost:
To make in-house = $87,000
To buy = $78,000 ($60,000 + $30,000 x 60%)
To buy now becomes more cost effective by $9,000 ($87,000 - 78,000).
Explanation:
a) Management in production companies are always faced with the buy or make decision. For this type of decision making, the appropriate costs to analyze are the differential (incremental) costs. These are costs that make a difference between alternatives.
b) Calculation of cost:
Make Buy
Total Unit
Purchase $60,000
Direct materials $25,000 $5.00
Direct labor 15,000 3.00
Variable manufacturing overhead 7,500 1.50
Variable marketing overhead 9,500 1.90
Fixed plant overhead 30,000 6.00 30,000
Total $87,000 $17.40 $90,000
Total variable costs $57,000 $60,000
