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Category > Management Posted 24 Jan 2018 My Price 9.00

Fresh Foods

Cornerstone Exercise 13-13 Structuring a Make-or-Buy Problem

Fresh Foods, a large restaurant chain, needed 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 out- side supplier for $12 each. Cost information on internal production includes the following:

Total Cost               Unit Cost

 

 

Direct materials

$25,000

 

$  5.00

 

Direct labor

15,000

 

3.00

 

Variable manufacturing overhead

7,500

 

1.50

 

Variable marketing overhead

10,000

 

2.00

 

Fixed plant overhead

30,000

 

6.00

 

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:

1.       What are the alternatives for Fresh Foods?

2.       List the relevant cost(s) of internal production and of external purchase.

3.       Which alternative is more cost effective and by how much?

4.       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?

Answers

Maurice Tutor
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Status NEW Posted 24 Jan 2018 08:01 PM My Price 9.00

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