Diamond Brands manufactures rice, wheat, and oat cereals. Sanders Company has approached Diamond Brands with a proposal to sell the company the rice cereals at a price of $22,000 for 20,000 pounds. The following costs are associated with production of 20,000 pounds of rice cereal: $\begin{array}{lr}
\text { Direct material } & \$ 13,000 \
\text { Direct labor } & 5,000 \
\text { Manufacturing overhead } & 7000\
\text { Total }&\$25,000
\end{array}$ The manufacturing overhead consists of $2,000 of variable costs with the balance being allocated fixed costs. Should Diamond Brands make or buy the rice cereal?

Question

Quizplus · Accepted Answer

The relevant cost of making the rice cereal is $20,000 ($13,000 + $5,000 + $2,000 variable overhead). Buying them costs $22,000, so making them is cheaper by $2,000.

Diamond Brands Manufactures Rice, Wheat, and Oat Cereals The Manufacturing Overhead Consists of $2,000 of Variable Costs with Has