Question

Zoomer Company produces Optimist sailboats. The costs of producing 100,000 tiller extensions for use in the boats are as follows: Direct labor $250,000 Direct materials 300,000 Variable overhead 65,000 Fixed overhead 185,000 An outside supplier has offered to supply the tiller extensions for $720,000. If Zoomer accepts the offer $85,000 of fixed costs can be avoided. What is the financial advantage (disadvantage) of accepting the supplier's offer?

Answer 1

It is cheaper to make the product in house.

Step-by-step explanation:

Giving the following information:

Direct labor $250,000 Direct materials 300,000 Variable overhead 65,000 Fixed overhead 185,000 An outside supplier has offered to supply the tiller extensions for $720,000. If Zoomer accepts the offer $85,000 of fixed costs can be avoided.

We will calculate the total cost of both options:

Make in the house:

Total cost= 250,000 + 300,000 + 65,000 + 185,000= $800,000

Buy:

Total cost= 720,000 + 100,000= $820,000

It is cheaper to make the product in house.