Question

Wood Chuck Furniture currently manufactures rocking chairs as its main product. Each chair uses one seat cushion and one back cushion with the following costs per set of cushions (one seat and one back): Direct materials $ 1 Direct labor 10 Variable overhead 5 Fixed overhead 8 Total $ 24 Shepert Company has contacted Wood Chuck with an offer to sell it 5,000 sets of cushions for $18 each. If Wood Chuck buys the cushions, $2 of the fixed overhead per unit will be allocated to other products. Should Wood Chuck make or buy the cushions

Answer 1

Answer:

Yes buy the cushions

Explanation:

The computation is shown below:

= Manufacturing cost - purchase cost

where,

Manufacturing cost is

= Direct materials + direct labor + variable overhead cost + fixed overhead cost

= $1 + $10 + $5 + $6

= $22

The fixed overhead cost is

= $8 - $2

= $6

And, Purchase cost is  $18

Savings cost is

= $22 - $18

= $4 per set

And, the number of sets is 4,000 cushion sets

So, total amount saved is

= 5,000 cushion sets ×$4 per set

= $20,000