ABC Company makes key chains. The total cost to make 1,000,000 key chains is as follows: Material……………………..$160,000 Labor…………………………$60,000 Indirect costs : Variable…………………$120,000 Fixed…………………… $170,000 Total Cost………………… $510,000 The XYZ Company has offered to make the chains for $.45 . If ABC Co. purchases the key chains from XYX Co. 40% of the fixed costs will be avoided. The remaining 60% will continue regardless of whether the key chains are manufactured or purchased. If the key chains are purchased the capacity currently used to make the key chains will be idle. In turn, the idle capacity can be leased out resulting in additional contribution of $50,000 with a related maintenance cost to ABC Co. of $20,000. Required: 1.Should the ABC Company make or buy the key chains and how much would ABC save or lose by buying the key chains from XYZ ?
ABC Company makes key chains. The total cost to make 1,000,000 key chains is as follows:
Material……………………..$160,000
Labor…………………………$60,000
Indirect costs :
Variable…………………$120,000
Fixed…………………… $170,000
Total Cost………………… $510,000
The XYZ Company has offered to make the chains for $.45 . If ABC Co. purchases the key chains from XYX Co. 40% of the fixed costs will be avoided. The remaining 60% will continue regardless of whether the key chains are manufactured or purchased.
If the key chains are purchased the capacity currently used to make the key chains will be idle. In turn, the idle capacity can be leased out resulting in additional contribution of $50,000 with a related maintenance cost to ABC Co. of $20,000.
Required:
1.Should the ABC Company make or buy the key chains and how much would ABC save or lose by buying the key chains from XYZ ?
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