Olde Charm Bakery makes sandwiches, pastries, cakes, and cookies. Currently it makes its own sourdough bread at a total unit cost of $1.72:
Direct materials $0.78
Direct labor 0.48
Variable OH 0.26
Fixed OH 0.20
Total unit cost $1.72
On average, Olde Charm Bakery needs 1,000 loaves of sourdough dough bread every month.
Kostco, a sourdough bread manufacturer, has approached Olde Charm Bakery with a proposal to provide all the bread that Olde Charm Bakery needs at a unit price of $1.50.
Should Olde Charm Bakery continue to make its own sourdough bread or should it buy it from Kostco? Assume 3/4 of the fixed OH is avoidable.
Answer
We have been provided with the information as follow
| Direct materials | 0.78 |
| Direct labor | 0.48 |
| Variable | 0.26 |
| Fixed | 0.2 |
| Total unit cost | 1.72 |
Now we will make analysis if it produce itself or make it out side
| Produce itself |
Kostco Produces |
Savings | |
| 1000 Units | 1000 Units | ||
| Direct materials | 780 | 780 | |
| Direct labor | 480 | 480 | |
| Variable | 260 | 260 | |
| Fixed (1000*0.20) |
200 | 200 | |
| Fixed Unavoidable (1000*0.20)*1/4 |
50 | -50 | |
| Purchase from Kostco 1000*1.50 |
1500 | -1500 | |
| 1720 | 1550 | 170 |
Comments:
Charm Bakery should buy it from Kostco because saving in the total cost by $ 170
