Bonus Problem 9 (S points) SotSeats produces chairs and couches for reception ar
ID: 2517952 • Letter: B
Question
Bonus Problem 9 (S points) SotSeats produces chairs and couches for reception areas and executive suites Nistorically, SoftSeats has manufactured their own cushions for the chair they sell Nowever, a cushion manufacturer has recently approached SoftSeats with an offer to produce their cushions for them for $45 per cushion. SoftSeats incurs the following costs in the production of the seat cushions: $10 for direct materials, $20 for direct labor, $10 for variable overhead, and $10 for fixed overhead. Management is wondering whether they should accept the offer What would be the increase or decrease in per-unit costs if the cushions were purchased from the outside supplier? S2018 ACCT 205 Exam # 3 Chaps 21,22 & 25 Early Exam 4-11-2018 12Explanation / Answer
Production cost of cushion by SofaSeats:
Direct Material = $10
Direct Labour = $20
Variable overhead = $10
Fixed overhead = $10
Total cost of manufacturing = $50
Offer from cushion manufacturer to SofaSeats = $45
However, the SofaSeats would still incur $10 fixed overhead over and above $45 price quoted by the outside supplier resulting in a total cost of $55.
Therefore, SofaSeats should continue manufacturing their own cushions.