The Chateau Company manufactures 4,000 telephones per year. The full manufacturing costs per telephone are as follows: Direct materials $4 Direct labor $16 Variable manufacturing overhead $12 Average fixed manufacturing overhead $12 Total $44 The Quick Assembly Company has offered to sell Chateau 4,000 telephones for $31 per unit. If Chateau accepts the offer, $20,000 of fixed overhead will be eliminated. Chateau should:

Answer: It is better to buy and accept the offer.

Explanation:

Making cost:

Direct Material = cost * No. of telephones manufactures

= 4 * 4000

= 16,000

Direct Labour = cost * No. of telephones manufactures

= 16 * 4,000

= 64,000

Variable overhead = cost * No. of telephones manufactures

= 12 * 4000

= 48,000

Fixed overhead = cost * No. of telephones manufactures

= 12 * 4000

= 48,000

Total cost:

= Direct Material + Direct Labour + Variable overhead + Fixed overhead

= 16,000 + 64,000 + 48,000 + 48,000

= $176,000

Buy cost:

Purchase price = Per unit price * No. of telephones purchase

= 31 * 4000

= 124,000

Fixed overhead = Fixed overhead from making - fixed overhead eliminated

= 48,000 - 20,000

= 28,000

Total cost = Purchase price + Fixed overhead

= 124,000 + 28,000

= 152,000

Therefore, it is better to buy and accept the offer.