Structuring a Make-or-Buy Problem Fresh Foods, a large restaurant chain, needed

Question

Structuring a Make-or-Buy Problem

Fresh Foods, a large restaurant chain, needed to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each. Cost information on internal production includes the following:

Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price. If required, round your answers to the nearest whole number.

1. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.)

2. Now assume that 40% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.)

$

Structuring a Special-Order Problem

Fixed overhead will not be affected by whether or not the special order is accepted.

2. By how much will operating income increase or decrease if the order is accepted?
$

Total Cost Unit Cost Direct materials $25,000 $5.00 Direct labor 15,000 3.00 Variable manufacturing overhead 7,500 1.50 Variable marketing overhead 8,500 1.70 Fixed plant overhead 30,000 6.00 Total $86,000 17.20

Explanation / Answer

Particualres Internally Externally Variable Cost 5000*11.2 ,5000*12 56000 60000 Fixed plant overhead 30000 30000 Total Cost 86000 90000 Manufacture Internally as total cost is less Particualres Internally Externally Variable Cost 56000 60000 Fixed plant overhead 30000*.60 for External 30000 18000 Total Cost 86000 78000 Purchase externally as total cost is less

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