Question

ABC enterprise produces baskets for the gift packages the company sells. The company uses 700 baskets in production each month. The costs of making one basket is $4 for direct materials, $3 for variable manufacturing overhead, $2 for direct labor, and $5 for fixed manufacturing overhead. The unit cost is based on the monthly production of 700 baskets. The company determined that 50% of the fixed manufacturing overhead is avoidable. An outside
supplier has offered to sell ABC the baskets for $12 each, and can supply all the units it needs. Do the differential analysis to determine if ABC enterprise should buy the baskets from the supplier. What is the differential cost to buy from the supplier?

Answer 1

	Make	Buy	Difference
Direct Material	$            2,800		$       2,800
Direct Labor	$            1,400		$       1,400
Variable Overhead	$            2,100		$       2,100
Fixed Overhead	$            1,750		$       1,750
Purchase Price		$           8,400	$     (8,400)
Total	$            8,050	$           8,400	$        (350)