Question

Paper Moon, a manufacturer of outdoor lighting fixtures is operating at less than full capacity. The plant manager is considering making the mounting brackets now being purchased from a supplier at $8 each. Paper Moon already has the equipment to produce the brackets. The plant manager has analyzed the cost of producing the brackets and determined that each bracket will require $2 of direct material, $1 of direct labor, and $8 of manufacturing overhead. Seventy-five percent of the manufacturing overhead is a fixed cost that would not be affected by the decision to manufacture the brackets. Should Paper Moon continue to purchase the brackets or produce them internally?

Answer 1

Answer:

The fixtures should be purchased     because it will save the Paper Moon by $3 per unit

Explanation:

To determine whether or not the fixtures should be manufacture purchased, we will compare the variable cost of making internally to the external purchase price.

Variable cost of  making = 2 + 1 + (25%× 8)= $5

Note that  the fixed manufacturing cost represents a cost that would be incurred irrespective of the decision taken. Hence it is considered. Only the variable portion is relevant.

                                                                                             

Variable cost of  making                                                     $5

External purchase price                                                      $8

Saving in cost by making                                                      $3

The fixtures should be purchased     because it will save the Paper Moon by $3 per unit