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, which are 30% unavoidable.What is the incremental cost per pound that Diamond will (incur) or save if it buys the rice cereal from Sanders?

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, which are 30% unavoidable.What is the incremental cost per pound that Diamond will (incur) or save if it buys the rice cereal from Sanders?

Quizplus · Accepted Answer

The incremental cost per pound saved by buying the rice cereal from Sanders is calculated by comparing the total avoidable costs of producing the rice cereal in-house to the cost of purchasing it from Sanders. The avoidable costs include direct material ($13,000), direct labor ($5,000), variable manufacturing overhead ($2,000), and 70% of the fixed manufacturing overhead ($5,000 * 70% = $3,500), totaling $23,500. The difference between the purchase cost ($22,000) and the avoidable costs ($23,500) is $1,500 savings. Dividing this by 20,000 pounds results in a $0.075 savings per pound.

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