Homework SourseWood Chuck Furniture currently manufactures rocking chairs a
Wood Chuck Furniture currently manufactures rocking chairs as its main product. Each chair uses one seat cushion and one back cushion with the following costs per set of cushions (one seat and one back):
Shepert Company has contacted Wood Chuck with an offer to sell it 5,000 sets of cushions for $18 each. If Wood Chuck buys the cushions, $2 of the fixed overhead per unit will be allocated to other products.
Should Wood Chuck make or buy the cushions?
Answer:
| Direct materials | $ | 1 | |||
| Direct labor | 10 | ||||
| Variable overhead | 5 | ||||
| Fixed overhead | 8 | ||||
| Total | $ | 24 |
Solution
Differential analysis :
Wood Chuck should buy to save $4 per set
| Make | Buy | |
| Direct material | 5000 | |
| Direct labour | 50000 | |
| Variable overhead | 25000 | |
| Fixed overhead (5000*6) | 30000 | |
| Purchase cost (5000*18) | 90000 | |
| Total relevant cost | 110000 | 90000 |
