Question

Baxter Corp currently makes 10,000 subcomponents annually. The unit production costs are as follows:

	Per Unit
Direct materials	$25
Direct labor	$10
Variable overhead	$15
Fixed overhead	$20

An outside supplier offers to provide Baxter Corp with the 10,000 subcomponents at a $65 per unit price.

(T or F) If Baxter Corp accepts the outside offer, then short-term profits will increase by $150,000.

True

or False

Answer 1

Answer------------False.

.

If Baxter Corp accepts the outside offer, then short-term profits will decrease by $150,000

Working

Total Cost of Buying	$           650,000
Total Cost of manufacturing	$           500,000
Financial advantage of making	$           150,000

..

Differential Analysis
	Make	Buy
Direct material	$     250,000.00
Direct labor	$     100,000.00
Variable Overheads	$     150,000.00
Avoidable Fixed overhead	$                       -
Purchase price		$       650,000.00
Total relevant Cost	$     500,000.00	$       650,000.00