Question

Wilson Corporation produces a large number of fishing products. The costs per unit of a particular fishing reel are as follows. Direct materials and direct labor $ 10 Variable factory overhead 6 Fixed factory overhead 4 The company recently decided to buy 10,000 fishing reels from another manufacturer for $18 per unit because "it was cheaper than our cost of $20 per unit." Is the decision made by Wilson's management correct or not? Correct Incorrect

Answer 1

Answer:

The decision is incorrect. It is cheaper to make in house.

Explanation:

Giving the following information:

Make in house:

Direct materials and direct labor 10

Variable factory overhead 6

Fixed factory overhead 4

The company recently decided to buy 10,000 fishing reels from another manufacturer for $18

We need to  calculate the unitary variable cost of production. Fixed costs are unavoidable, therefore they shouldn't be taken into account.

Variable cost= direct material + direct labor + variable overhead

Variable cost= 10 + 6= $16

The decision is incorrect. It is cheaper to make in house.