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: $$\begin{array} { l r }
\text { Direct material } & \$ 13,000 \
\text { Direct labor } & 5,000 \
\text { Manufacturing overhead } & 7,000 \
\text { Total } & \$ 25,000
\end{array}$$ The manufacturing overhead consists of $2,000 of variable costs with the balance being allocated to fixed costs.What is the amount of avoidable costs if Diamond Brands buys rather than makes the rice cereal?

Question

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: $$\begin{array} { l r } 
\text { Direct material } & \$ 13,000 \
\text { Direct labor } & 5,000 \
\text { Manufacturing overhead } & 7,000 \
\text { Total } & \$ 25,000
\end{array}$$ The manufacturing overhead consists of $2,000 of variable costs with the balance being allocated to fixed costs.What is the amount of avoidable costs if Diamond Brands buys rather than makes the rice cereal?

Quizplus · Accepted Answer

Avoidable costs are those that can be eliminated if an action is taken. In this case, if Diamond Brands buys the rice cereal instead of making it, they can avoid the direct material ($13,000), direct labor ($5,000), and variable portion of the manufacturing overhead ($2,000). The fixed portion of the manufacturing overhead ($5,000) would remain, as it does not vary with production. Therefore, the avoidable costs are $13,000 + $5,000 + $2,000 = $20,000. Fixed costs are not avoidable in the short term, as they would be incurred regardless of the decision.

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