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Mallory Company manufactures widgets. Bowden Company has approached Mallory with a proposal to sell the company widgets at a price of $82,000 for 100,000 units. Mallory is currently making these components in its own factory. The following costs are associated with this part of the process when 100,000 units are produced: Direct material $ 31,000 Direct labor 29,000 Manufacturing overhead 40,000 Total $100,000 The manufacturing overhead consists of $16,000 of costs that will be eliminated if the components are no longer produced by Mallory. From Mallory's point of view, how much is the incremental cost or savings if the widgets are bought instead of made?

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Answer:

It is cheaper to make the products in-house by $6,000.

Explanation:

Giving the following information:

Buy:

Total cost= $82,000

The number of units= 100,000

Production:

Total cost= $100,000

The number of units= 100,000

Unavoidable manufacturing overhead= 40,000 - 16,000= $24,000

We need to add the unavoidable manufacturing overhead costs to the buying option to determine the actual total cost:

Buy= 82,000 + 24,000= $106,000

It is cheaper to make the products in-house by $6,000.

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