Question

Mohave Corp. is considering outsourcing production of the umbrella tote bag included with some of its products. The company has received a bid from a supplier in Vietnam to produce 8,900 units per year for $7.50 each. Mohave has the following information about the cost of producing tote bags: Direct materials $4.00 Direct labor 1.00 Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit 1.00 2.00 $8.00 Mohave has determined that all variable costs could be eliminated by outsourcing the tote bags, while 70 percent of the fixed overhead cost is unavoidable. At this time, Mohave has no specific use in mind for the space currently dedicated to producing the tote bags Required: 1. Compute the difference in cost between making and buying the umbrella tote bag. 2. Based strictly on the incremental analysis, should Mohave buy the tote bags or continue to make them? 3-a. Suppose that the space Mohave currently uses to make the bags could be utilized by a new product line that would generate $12,000 in annual profits. Recompute the difference in cost between making and buying the umbrella tote bag. 3-b. Does this change your recommendation to Mohave? Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3A Req 3B Compute the difference in cost between making and buying the umbrella tote bag.

Answer 1

1
	Per unit		Total 8900 units
	Make	Buy	Make	Buy
Direct materials	4.00		35600
Direct labor	1.00		8900
Variable manufacturing overhead	1.00		8900
Fixed manufacturing overhead avoidable	0.60		5340
Purchase cost		7.50		66750
Total			58740	66750
Differential cost of making Versus Buying	8010	Favors making	=58740-66750
2
Continue to Make them
3a
	Make	Buy
Total cost	58740	66750
Opportunity cost	12000
Total relevant cost	70740	66750
Differential cost of making Versus Buying	3990	Favors buying	=70740-66750
3b
Yes, now the recommendation is Buy