Please help me out with this question Mohave Corp. is considering outsourcing pr

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Please help me out with this question

Mohave Corp. is considering outsourcing production of the umbrella tote bag included with some of its products. The company has received a bid from Willow Co. to produce 8,700 units per year for $10 each. Mohave has the following information about its own production of the tote bags Direct materials $6 Direct labor Variable manufacturing overhead 1.5 Fixed manufacturing overhead Total cost per unit $10.5 Mohave has determined that all variable costs could be eliminated by dropping production of the tote bags, while 70 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. Required: Compute the difference in cost between making and buying the umbrella tote bag. Differential Cost of Making Versus Buying Suppose that the space Mohave currently uses to make the bags could be utilized by a new product line that would generate $12,000 in annual profits. Recompute the difference in cost between making and buying the umbrella tote bag. Differential Cost of Making Versus Buying

Explanation / Answer

Unavoidable fixed cost is a sunk cost and it is irrelevant in decision making .

Unavoidable fixed cost = sunk cost = 70% of fixed manufacturing overhead

= 70% of (1.5*8700)

= $9135

Part-1

Cost of making = 10.5*8700

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