Sheridan, Inc. currently manufactures a wicket as its main product. The costs per unit are as follows:

Direct materials and direct labor $13

Variable overhead 5

Fixed overhead 8

Total $26

Saran Company has contacted Sheridan with an offer to sell it 5900 of the wickets for $20 each. If Sheridan makes the wickets, variable costs are $18 per unit. Fixed costs are $8 per unit; however, $5 per unit is unavoidable.

Should Sheridan make or buy the wickets?

Question

Kody Gray

Business

4 December, 09:57

Sheridan, Inc. currently manufactures a wicket as its main product. The costs per unit are as follows:

Direct materials and direct labor $13

Variable overhead 5

Fixed overhead 8

Total $26

Saran Company has contacted Sheridan with an offer to sell it 5900 of the wickets for $20 each. If Sheridan makes the wickets, variable costs are $18 per unit. Fixed costs are $8 per unit; however, $5 per unit is unavoidable.

Should Sheridan make or buy the wickets?

+1

Answers (1)

Know the Answer?

Marilyn Hartman · Answer 1

Answer

Sheridan should buy because doing so would save it $5900

Explanation

To determine the right course of action we will consider the relevant cost of making and buying

The relevant cost of making $

Variable cost (18 * 5,900 106200

Fixed cost (3 * 5,900) 17700

Total cost 123,900

Relevant of buying (20 * 5,900) = 118,000

Saving in cost by buying = 123,900 - 118,000 = $5900