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Question - The Smart Company currently manufactures wood cutting boards as its main product. Each cutting board has two handles on each side. The costs per handle include the following:
Direct materials $2.00
Direct labour 4.00
Variable overhead 1.00
Fixed overhead 3.00
Total $10.00
ABC Company has contacted The Smart Company with an offer to sell it 5,000 handles for $8.00 each. There would be no changes to fixed overhead costs if the handles were purchased from ABC Company.
Required - Calculate the difference with income for this make or buy situation and explain if The Smart Company should make or buy the handles.
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