Bonus Problem 9 (5 points): SoftSeats produces chairs and couches for reception

Question

Bonus Problem 9 (5 points): SoftSeats produces chairs and couches for reception areas and executive suites. Historically, SoftSeats has manufactured their own cushions for the chair they sell. However, 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?

Explanation / Answer

Direct material $10

Direct labor $20

Variable overhead $10

Total relevant cost is $40

Fixed overhead is not relevant cost.

Softseats incurs $40 per unit by manufacturing their own cushions.Outside suppliers offers cushions at $45 per unit. If sofaseats accepts outside suppliers offer, then its per unit cost will increase by $5 ($45-$40)per unit.

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