Question

Hot Dog Express (HDE) is currently buying buns from Buns-For-All for $0.50 a dozen. Each month, it purchases 14,000 dozen. HDE is considering making its own buns for cost cutting and quality reasons. HDE has determined the following costs per dozen buns: materials, $0.20; direct labor, $0.10; variable factory overhead cost, $0.04. Total (existing) fixed costs are $3,000 per month. From an accounting point of view only, should HDE make or buy the buns?

Answer 1

HDE should make the buns in order to save $2,240

Step-by-step explanation:

Hot Dog Express's current costs:

14,000 dozens x $0.50 per dozen = $7,000

Incremental analysis of the alternative course of action:

total production 14,000 dozens of buns

direct materials $0.20 per dozen

direct labor $0.10

variable overhead $0.04

fixed costs $3,000 not to be accounted for since they already exist and will continue whether this alternative is taken or not.

total costs for alternative course = 14,000 dozens x ($0.20 + $0.10 + $0.04) = 14,000 dozens x $0.34 per dozen = $4,760

If HDE decides to take the alternative course (manufacture their own buns) they will save $2,240 (= $7,000 - $4,760)