Question

The Nelson Company manufactures a unit called X. Variable manufacturing costs per unit of X are as follows: Direct materials $1 Direct labor $10 Variable manufacturing overhead $5 The Nelson Company has offered to sell Nelson 10,000 units of X for $22 per unit. If Nelson accepts the offer, $50,000 of fixed manufacturing overhead will be eliminated. Nelson should:

Answer 1

Answer:

It is more profitable to make the units in-house.

Explanation:

Giving the following information:

Variable manufacturing costs per unit of X are as follows:

Direct materials $1

Direct labor $10

Variable manufacturing overhead $5

Total unitary variable cost= $16

Number of units= 10,000 units

Buying price= $22 per unit.

If Nelson accepts the offer, $50,000 of fixed manufacturing overhead will be eliminated.

We need to calculate the total cost of each option and choose the cheapest one:

Production:

Total cost= 10,000*16 + 50,000= $210,000

Buy:

Total cost= 10,000*22= $220,000

It is more profitable to make the units in-house.