Question

Carmen manufactures a unit called A2. Variable manufacturing costs per unit of A2 are as follows:The Don Company has offered to sell Carmen 5,000 units of A2 for $22 per unit. If Carmen accepts the offer, $60,000 of fixed manufacturing overhead will be eliminated.Applying differential analysis to the situation, what should Carmen do? Support your answers with the calculations you used to make your decision.Direct materials$1Direct labor$10Variable manufacturing overhead$5

Answer 1

Accepted

Step-by-step explanation:

In this question, we have to compare the make or buy options which are shown below:

Particulars Make Buy

Direct materials (5,000 units × $1) $5,000

Direct labor (5,000 units × $10) $50,000

Variable manufacturing overhead

(5,000 units × $5) $25,000

Fixed manufacturing overhead $60,000 $110,000 (5,000 units × $22)

Total $140,000 $110,000

Since in buy decision, the cost is minimum. So, the company should accept this offer