Tool Time manufactures carpenter-grade screwdrivers.The company is trying to decide whether to continue to make the case in which the screwdrivers are sold, or to outsource the case to another company.The direct material and direct labor cost to produce the cases total $2.00 per case.The overhead cost is $1.00 per case which consists of $0.40 in variable overhead that would be eliminated if the cases are bought from the outside supplier.The $0.60 of fixed overhead is based on expected production of 200,000 cases per year and consists of the salary of the case production manager of $40,000 per year, along with the remainder consisting of rent, insurance, and depreciation on equipment that will have no resale value.The manager will be laid off if the cases were bought externally.The outside supplier has offered to supply the cases for $2.80 each.How much will Tool Time save or lose if the cases are bought externally?
A)Save $0.40 per case
B)Lose $0.20 per case
C)Lose $0.80 per case
D)Save $0.20 per case

Question

Quizplus · Accepted Answer

The cost to produce a case internally is $2.00 (direct material and labor) + $0.40 (variable overhead) = $2.40. The fixed overhead ($0.60 per case) would still be incurred even if production is outsourced, as it includes the salary of the case production manager and other fixed costs. Therefore, comparing the internal cost of $2.40 to the external purchase price of $2.80, Tool Time would lose $0.40 per case by outsourcing. However, since the fixed overhead was mistakenly included in the initial calculation and it should not be considered for the incremental analysis of outsourcing, the correct comparison is between the $2.40 internal cost (which mistakenly included fixed costs that are not saved if production is outsourced) and the external cost of $2.80. Correcting this oversight, the actual cost to consider for making the case internally is $2.00 (direct material and labor) + $0.40 (variable overhead) = $2.40. Since the fixed overhead would remain regardless of the decision, it should not factor into the incremental cost comparison for outsourcing. Therefore, the correct incremental cost to produce internally is actually $2.00 (ignoring the fixed overhead since it's not saved by outsourcing), making the comparison $2.00 (true incremental cost to produce) vs. $2.80 (cost to buy), leading to a loss of $0.80 per case if outsourced, which contradicts the provided options and explanation. The correct approach is to compare the avoidable costs of $2.40 (direct costs and variable overhead) with the external cost of $2.80, leading to a correct conclusion that outsourcing would result in a loss, but the specific calculation provided in the options does not accurately reflect this analysis. Given the options, none directly align with the corrected analysis, indicating a mistake in the initial explanation. The correct answer, based on the options provided and considering only avoidable costs, should reflect the comparison between the internal avoidable costs and the external cost, which was not accurately captured in the explanation.

Tool Time Manufactures Carpenter-Grade Screwdrivers