What in-house unit cost should be used to compare

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Reference no: EM132816083

Davis Kitchen Supply produces stoves for commercial kitchens. The costs to manufacture and market the stoves at the company's normal volume of 6,000 units per month are shown in the following table.

Unit manufacturing costs

Variable materials$51
Variable labor 76
Variable overhead 26
Fixed overhead 61
Total unit manufacturing costs $214
Unit marketing costs
Variable 26
Fixed 71
Total unit marketing costs 97
Total unit costs $311

Problem a. A proposal is received from an outside contractor who will make and ship 2,000 stoves per month directly to Davis's customers as orders are received from Davis's sales force. Davis's fixed marketing costs would be unaffected, but its variable marketing costs would be cut by 20 percent for these 2,000 units produced by the contractor. Davis's plant would operate at two-thirds of its normal level, and total fixed manufacturing costs would be cut by 25 percent. What in-house unit cost should be used to compare with the quotation received from the supplier? Assume the payment to the outside contractor is $216.

Problem b. Should the proposal be accepted for a price (that is, payment to the outside contractor) of $216 per unit?

Reference no: EM132816083

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