Company D has been manufacturing its own seats. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 70% of direct labor cost. The direct materials and direct labor cost per unit to make the seats are $8.00 and $9.00, respectively. Normal production is 50,000 units per year. A supplier offers to make the seats at a price of $20 each. If the company accepts this offer, all variable manufacturing costs will be eliminated, but the $30,000 of fixed manufacturing overhead currently being charged to the seats will have to be absorbed by other products. Instructions Prepare the incremental analysis for the decision to make or buy the seats.
Company D has been manufacturing its own seats. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 70% of direct labor cost. The direct materials and direct labor cost per unit to make the seats are $8.00 and $9.00, respectively. Normal production is 50,000 units per year. A supplier offers to make the seats at a price of $20 each. If the company accepts this offer, all variable manufacturing costs will be eliminated, but the $30,000 of fixed manufacturing overhead currently being charged to the seats will have to be absorbed by other products. Instructions Prepare the incremental analysis for the decision to make or buy the seats.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Company D has been manufacturing
its own seats. The company is currently
operating at 100% capacity, and
variable manufacturing overhead is
charged to production at the rate of
70% of direct labor cost. The direct
materials and direct labor cost per unit
to make the seats are $8.00 and $9.00,
respectively. Normal production is
50,000 units per year.
A supplier offers to make the seats at a
price of $20 each. If the company
accepts this offer, all variable
manufacturing costs will be eliminated,
but the $30,000 of fixed
manufacturing overhead currently
being charged to the seats will have to
be absorbed by other products.
Instructions
Prepare the incremental analysis for
the decision to make or buy the seats.
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