Question

Diamond Brands manufactures rice, wheat, and oat cereals. Sanders Company has approached Diamond Brands with a proposal to sell the company the rice cereals at a price of $22,000 for 20,000 pounds. The following costs are associated with production of 20,000 pounds of rice cereal: Direct material $13,000 Direct labor 5,000 Manufacturing overhead 7,000 Total $25,000 The manufacturing overhead consists of $2,000 of variable manufacturing overhead costs with the balance being fixed manufacturing overhead costs. The fixed manufacturing overhead is unaffected by the decision to make or buy. Should Diamond Brands make or buy the rice cereal

Answer 1

Diamond Brands should buy the rice cereal from Sanders Company.

Step-by-step explanation:

To determine whether Diamond Brands should make or buy the rice cereal, we need to compare the costs of making the cereal internally versus buying it from Sanders Company.

The costs associated with production of 20,000 pounds of rice cereal are as follows:

• Direct material: $13,000
• Direct labor: $5,000
• Variable manufacturing overhead: $2,000
• Fixed manufacturing overhead: $7,000

Thus, the total cost of production is $27,000. However, Sanders Company is offering to sell 20,000 pounds of rice cereal to Diamond Brands for $22,000. Since the buying price is lower than the total cost of production, it would be more cost-effective for Diamond Brands to buy the rice cereal from Sanders Company.

Answer 2

D. Continue to make them because the incremental cost of buying is $22,000

Step-by-step explanation:

Since the total manufacturing cost is $23,000 and the purchasing cost is $22,000 so the difference is very loss so it is to be continued by making them as the buying incremental cost is $22,000

Therefore the option d is correct

Hence, the other options are wrong