Question

A Microwave Company currently manufactures the doors that it uses for its microwave ovens. The annual costs to manufacture the 40,000 doors needed each year are as follows: Total Cost Direct material $250,000 Direct labor 40,000 Variable manufacturing overhead 80,000 Fixed manufacturing overhead 320,000 Total $690,000 Delilah Glass Corporation has offered to provide Quikcook with all of its annual door needs for $14 per door. If the company accepts this offer, only 40% of the fixed overhead above could be totally eliminated. Also, the company has no alternative use for the idle facilities if the decision was made to go with Delilah's offer. Based on this information, would the company be better off to make the doors or buy the doors and by how much?

Answer 1

Based on the given information, the company would be better off to buy the doors. The total cost for manufacturing the doors is $690,000 whereas Delilah Glass Corporation offered to provide the company with all of its annual door needs for $14 per door. Moreover, if the company accepts Delilah's offer, 40% of the fixed overhead above could be totally eliminated. Therefore, the company would save $32,000 if it accepts Delilah's offer.The company's current annual costs for manufacturing 40,000 doors include direct material, direct labor, variable manufacturing overhead, and fixed manufacturing overhead. The total cost of manufacturing the doors is $690,000. Delilah Glass Corporation has offered to provide the company with all of its annual door needs for $14 per door. If the company accepts this offer, 40% of the fixed overhead above could be totally eliminated. The company has no alternative use for the idle facilities if the decision was made to go with Delilah's offer. Therefore, the company would save $32,000 if it accepts Delilah's offer.