Question

The Northern Ring Company manufactures 2,000 telephones per year. The full manufacturing costs per telephone are as follows: Direct materials $ 2 Direct labor 8 Variable manufacturing overhead 6 Average fixed manufacturing overhead 6 Total $22 The Texas Ring Company has offered to sell Northern Ring Company 2,000 telephones for $15 per unit. If Northern Ring Company accepts the offer, $10,000 of fixed overhead will be eliminated. Northern Ring should: Select one: A. Buy the telephones; the savings is $12,000 B. Make the telephones; the savings is $2,000 C. Buy the telephones; the savings is $24,000 D. Make the telephones; the savings is $12,000

Answer 1

Answer:

A. Buy the telephones; the savings is $12,000

Explanation:

The computation is shown below;

Particulars                    Without offer                  with offer

Direct material              $4,000                              $0

                              (2,000 × $2)

Direct labor              $16,000                                 $0

                             (2,000 × $8)

Variable manufacturing overhead $12,000         $0

                             (2,000 × $6)

Fixed manufacturing overhead $12,000             $2,000

                                                                 ($12,000 - $10,000)

Purchase cost                                                        $30,000

                                                                  ($2,000  × $15)

Total cost                   $44,000                        $32,000

Therefore the option A is correct