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22 May, 07:16

Paper Moon, a manufacturer of outdoor lighting fixtures is operating at less than full capacity. The plant manager is considering making the mounting brackets now being purchased from a supplier at $8 each. Paper Moon already has the equipment to produce the brackets. The plant manager has analyzed the cost of producing the brackets and determined that each bracket will require $2 of direct material, $1 of direct labor, and $8 of manufacturing overhead. Seventy-five percent of the manufacturing overhead is a fixed cost that would not be affected by the decision to manufacture the brackets. Should Paper Moon continue to purchase the brackets or produce them internally?

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  1. 22 May, 07:39
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    The fixtures should be purchased because it will save the Paper Moon by $3 per unit

    Explanation:

    To determine whether or not the fixtures should be manufacture purchased, we will compare the variable cost of making internally to the external purchase price.

    Variable cost of making = 2 + 1 + (25% * 8) = $5

    Note that the fixed manufacturing cost represents a cost that would be incurred irrespective of the decision taken. Hence it is considered. Only the variable portion is relevant.

    Variable cost of making $5

    External purchase price $8

    Saving in cost by making $3

    The fixtures should be purchased because it will save the Paper Moon by $3 per unit
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