Company A, a large restaurant chain, needs 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: TOTAL COSTUNIT COSTDIRECT MATERIALS$25,000$5DIRECT LABOR15,0003VARIABLE MANUFACTURING OVERHEAD7,5001.5VARIABLE MARKETING OVERHEAD10,0002FIXED PLANT OVERHEAD30,0006 TOTAL87,50017.50Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price.Required:What are the alternatives for Company A?List the relevant cost(s) of internal production and of external purchase.Which alternative is more cost effective and by how much?Now assume that 20% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more cost effective and by how much?

Here is the case that company A has two options for the main food ingredient,internal…

Answered: Company A, a large restaurant chain,…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Company A, a large restaurant chain, needs 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:

	TOTAL COST	UNIT COST
DIRECT MATERIALS	$25,000	$5
DIRECT LABOR	15,000	3
VARIABLE MANUFACTURING OVERHEAD	7,500	1.5
VARIABLE MARKETING OVERHEAD	10,000	2
FIXED PLANT OVERHEAD	30,000	6
TOTAL	87,500	17.50

Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price.

Required:

What are the alternatives for Company A?
List the relevant cost(s) of internal production and of external purchase.
Which alternative is more cost effective and by how much?
Now assume that 20% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more cost effective and by how much?

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