Question

Molly C. has just purchased a pasta manufacturing business. Molly’s new business produces ravioli, tortellini, and other cheese-filled pastas. The pasta is flash-frozen and shipped throughout the country for sale in upscale grocery stores. Molly estimates that she will use 10,000 pounds of cheese filling each month, and that each type of pasta is filled with .5 ounce of the cheese filling. The cheese filling consists of 3 types of cheese, eggs, and spices. The costs associated with each pound of cheese filling consist of $10.64 direct materials, $14.96 direct labor, $14.60 variable overhead, and $13.00 fixed overhead. Pasta Specialties (PS) has approached Molly and offered to supply 10,000 pounds of cheese filling each month for $405,200. If the variable costs of production can be avoided, should Molly accept the PS offer, why or why not?
A : yes, because Molly will save $12.68 per pound by purchasing externally
B : no, because Molly will save $1.92 per pound by producing internally
C : no, because Molly will save $.32 per pound by producing internally
D : no, because Molly will save $14.92 per pound by producing internally

Answer 1

Answer:

The correct answer is C.

Explanation:

Giving the following information:

Molly estimates that she will use 10,000 pounds of cheese filling each month. The costs associated with each pound of cheese filling consist of $10.64 direct materials, $14.96 direct labor, $14.60 variable overhead, and $13.00 fixed overhead. Pasta Specialties (PS) has approached Molly and offered to supply 10,000 pounds of cheese filling each month for $405,200.

Make in house:

Unitary cost= 10.64 + 14.96 + 14.60= $40.2

Nose of the fixed cost are avoidable, therefore they are taken into account to make the decition.

Buy= 405,200/10,000= $40.52

Cost difference= 40.2 - 40.52= -0.32