PA7-2 (Algo) Analyzing Make-or-Buy Decision [LO 7-2, 7-4] Mohave Corp. is considering outsourcing production of the umbrella tote bag included with some of its products. The company has received a bid from a supplier in Vietnam to produce 8,800 units per year for $6.50 each. Mohave has the following information about the cost of producing tote bags: $3.00 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit 1.00 1.00 2.00 $7.00 Mohave has determined that all variable costs could be eliminated by outsourcing the tote bags, while 70 percent of the fixed overhead cost is unavoidable. At this time, Mohave has no specific use in mind for the space currently dedicated to producing the tote bags. Required: 1. Compute the difference in cost between making and buying the umbrella tote bag. 2. Based strictly on the incremental analysis, should Mohave buy the tote bags or continue to make them? 3-a. Suppose that the space Mohave currently uses to make the bags could be utilized by a new product line that would generate $12,000 in annual profits. Recompute the difference in cost between making and buying the umbrella tote bag. 3-b. Does this change your recommendation to Mohave?
PA7-2 (Algo) Analyzing Make-or-Buy Decision [LO 7-2, 7-4] Mohave Corp. is considering outsourcing production of the umbrella tote bag included with some of its products. The company has received a bid from a supplier in Vietnam to produce 8,800 units per year for $6.50 each. Mohave has the following information about the cost of producing tote bags: $3.00 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit 1.00 1.00 2.00 $7.00 Mohave has determined that all variable costs could be eliminated by outsourcing the tote bags, while 70 percent of the fixed overhead cost is unavoidable. At this time, Mohave has no specific use in mind for the space currently dedicated to producing the tote bags. Required: 1. Compute the difference in cost between making and buying the umbrella tote bag. 2. Based strictly on the incremental analysis, should Mohave buy the tote bags or continue to make them? 3-a. Suppose that the space Mohave currently uses to make the bags could be utilized by a new product line that would generate $12,000 in annual profits. Recompute the difference in cost between making and buying the umbrella tote bag. 3-b. Does this change your recommendation to Mohave?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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![PA7-2 (Algo) Analyzing Make-or-Buy Decision [LO 7-2, 7-4]
Mohave Corp. is considering outsourcing production of the umbrella tote bag included with some of its products. The company has
received a bid from a supplier in Vietnam to produce 8,800 units per year for $6.50 each. Mohave has the following information about
the cost of producing tote bags:
Direct materials
$3.00
Direct labor
1.00
Variable manufacturing overhead
Fixed manufacturing overhead
Total cost per unit
1.00
2.00
$7.00
Mohave has determined that all variable costs could be eliminated by outsourcing the tote bags, while 70 percent of the fixed
overhead cost is unavoidable. At this time, Mohave has no specific use in mind for the space currently dedicated to producing the tote
bags.
Required:
1. Compute the difference in cost between making and buying the umbrella tote bag.
2. Based strictly on the incremental analysis, should Mohave buy the tote bags or continue to make them?
3-a. Suppose that the space Mohave currently uses to make the bags could be utilized by a new product line that would generate
$12,000 in annual profits. Recompute the difference in cost between making and buying the umbrella tote bag.
3-b. Does this change your recommendation to Mohave?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F3d069635-5563-4ddc-b66c-8b66fac5312c%2F929657f7-6ad0-4198-94e4-1bf20f3e9f23%2Fxdbpot_processed.jpeg&w=3840&q=75)
Transcribed Image Text:PA7-2 (Algo) Analyzing Make-or-Buy Decision [LO 7-2, 7-4]
Mohave Corp. is considering outsourcing production of the umbrella tote bag included with some of its products. The company has
received a bid from a supplier in Vietnam to produce 8,800 units per year for $6.50 each. Mohave has the following information about
the cost of producing tote bags:
Direct materials
$3.00
Direct labor
1.00
Variable manufacturing overhead
Fixed manufacturing overhead
Total cost per unit
1.00
2.00
$7.00
Mohave has determined that all variable costs could be eliminated by outsourcing the tote bags, while 70 percent of the fixed
overhead cost is unavoidable. At this time, Mohave has no specific use in mind for the space currently dedicated to producing the tote
bags.
Required:
1. Compute the difference in cost between making and buying the umbrella tote bag.
2. Based strictly on the incremental analysis, should Mohave buy the tote bags or continue to make them?
3-a. Suppose that the space Mohave currently uses to make the bags could be utilized by a new product line that would generate
$12,000 in annual profits. Recompute the difference in cost between making and buying the umbrella tote bag.
3-b. Does this change your recommendation to Mohave?
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