Question

Carmen manufactures a unit called A2. Variable manufacturing costs per unit of A2 are as follows:The Don Company has offered to sell Carmen 5,000 units of A2 for $22 per unit. If Carmen accepts the offer, $60,000 of fixed manufacturing overhead will be eliminated.Applying differential analysis to the situation, what should Carmen do? Support your answers with the calculations you used to make your decision.Direct materials$1Direct labor$10Variable manufacturing overhead$5

Answer 1

Answer:

Accepted

Explanation:

In this question, we have to compare the make or buy options which are shown below:

Particulars                                                    Make                    Buy

Direct materials (5,000 units × $1)           $5,000

Direct labor (5,000 units × $10)               $50,000

Variable manufacturing overhead

(5,000 units × $5)                                     $25,000

Fixed manufacturing overhead              $60,000           $110,000 (5,000 units  × $22)                                                                                  

Total                                                        $140,000                $110,000

Since in buy decision, the cost is minimum. So, the company should accept this offer