Cooper Corporation makes bicycles. For many years, Cooper has made the rear wheel assembly for its bicycles. Recently, Rojas Company offered to sell these rear wheel assemblies to Cooper. If Cooper makes the assembly, its cost per rear wheel assembly is as follows: Direct materials $8.00 Direct labor 15.00 Variable manufacturing overhead 8.00 Fixed manufacturing overhead, avoidable 6.00 Fixed manufacturing overhead, unavoidable (allocated on the basis of labor-hours) 8.00 Unit product cost $45.00 These costs are based on an annual production of 40,000 units. Rojas offered to sell the assembly to Cooper for $32.00 each. The total order would amount to 40,000 rear wheel assemblies per year, which Cooper’s management will buy instead of making if the company can save at least $100,000 per year. Required: a) Should Cooper make rear wheel assemblies or buy them from Rojas? Show computations.
Cooper Corporation makes bicycles. For many years, Cooper has made the rear wheel assembly for its bicycles. Recently, Rojas Company offered to sell these rear wheel assemblies to Cooper. If Cooper makes the assembly, its cost per rear wheel assembly is as follows: Direct materials $8.00 Direct labor 15.00 Variable manufacturing overhead 8.00 Fixed manufacturing overhead, avoidable 6.00 Fixed manufacturing overhead, unavoidable (allocated on the basis of labor-hours) 8.00 Unit product cost $45.00 These costs are based on an annual production of 40,000 units. Rojas offered to sell the assembly to Cooper for $32.00 each. The total order would amount to 40,000 rear wheel assemblies per year, which Cooper’s management will buy instead of making if the company can save at least $100,000 per year. Required: a) Should Cooper make rear wheel assemblies or buy them from Rojas? Show computations.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Cooper Corporation makes bicycles. For many years, Cooper has made the rear wheel assembly for its bicycles. Recently, Rojas Company offered to sell these rear wheel assemblies to Cooper. If Cooper makes the assembly, its cost per rear wheel assembly is as follows:
Direct materials $8.00
Direct labor 15.00
Variable manufacturing overhead 8.00
Fixed manufacturing overhead, avoidable 6.00
Fixed manufacturing overhead, unavoidable
(allocated on the basis of labor-hours) 8.00
Unit product cost $45.00
These costs are based on an annual production of 40,000 units.
Rojas offered to sell the assembly to Cooper for $32.00 each. The total order would amount to 40,000 rear wheel assemblies per year, which Cooper’s management will buy instead of making if the company can save at least $100,000 per year.
Required:
a) Should Cooper make rear wheel assemblies or buy them from Rojas? Show computations.
Expert Solution
Step 1 Description
According to the given question, we are required to compute the total product cost and give suggestions about the make or buy decision.
Avoidable fixed cost:
The avoidable fixed cost indicates the costs which a company is not mandatorily required to pay to produce the product. For example, advertising expenses paid for the product.
Make or buy decision:
Maker or buy decision refers to the cost accounting method by which a company can make a decision of either manufacturing a product or purchasing the product from a market.
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