Mohave Corp. is considering outsourcing production of the
umbrella tote bag included with some of its products. The company
has received a bid from a supplier in Vietnam to produce 10,000
units per year for $7.00 each. Mohave has the following information
about the cost of producing tote bags:
Direct materials $3
Direct labor $2
Variable manufacturing overhead $1
Fixed manufacturing overhead $2.50
Total cost per unit $8.50
Mohave has determined that all variable costs could be
eliminated by outsourcing the tote bags, while 75 percent of the
fixed overhead cost is unavoidable. At this time, Mohave has no
specific use in mind for the space currently dedicated to producing
the tote bags.
Compute the difference in cost between making and buying the
umbrella tote bag.
Suppose that the space Mohave currently uses to make the bags
could be utilized by a new product line that would generate $6,000
in annual profits. Recompute the difference in cost between making
and buying the umbrella tote bag.