Answer:
Opportunity cost ($481,000) is greater than the total production cost ($356,000). McMurphy corporation should produce the products by itself instead of buying from Conners Company since the production costs are lower than purchase cost
Explanation:
Determine the total cost associated with the production of the units as follows;
T=M+L+V+F
where;
T=total costs
M=direct materials cost
L=direct labor costs
V=variable factory overhead costs
F=fixed factory overhead costs
In our case;
M=$88,000
L=$127,000
V=$59,000
F=$137,000
replacing;
T=(88,000+127,000+59,000+137,000)=$411,000
Total costs=$411,000
Assuming the McMurphy avoids 55,000 fixed factory overhead cost;
Total costs=411,000-55,000=$356,000
The opportunity cost if McMurphy Corporation decides to purchase the units from Conners Company instead of producing them will be;
Opportunity cost=cost per unit×number of units
cost per unit=$37
number of units=13,000 units
Opportunity cost=37×13,000=$481,000
Opportunity cost ($481,000) is greater than the total production cost ($356,000). McMurphy corporation should produce the products by itself instead of buying from Conners Company since the production costs are lower than purchase cost
