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Structuring a Make-or-Buy Problem Fresh Foods, a large restaurant chain, needs to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each. Cost information on internal production includes the following: Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price. Required: 1. What are the alternatives for Fresh Foods? 2. List the relevant cost(s) of internal production and of external purchase. 3. Which alternative is more cost effective and by how much? 4. Now assume that 20% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more cost effective and by how much?

BuyFind

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
Publisher: Cengage Learning
ISBN: 9781337115773
BuyFind

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
Publisher: Cengage Learning
ISBN: 9781337115773

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Chapter
Section
Chapter 8, Problem 16BEA
Textbook Problem
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Structuring a Make-or-Buy Problem

Fresh Foods, a large restaurant chain, needs to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each. Cost information on internal production includes the following:

Chapter 8, Problem 16BEA, Structuring a Make-or-Buy Problem Fresh Foods, a large restaurant chain, needs to determine if it

Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price.

Required:

  1. 1. What are the alternatives for Fresh Foods?
  2. 2. List the relevant cost(s) of internal production and of external purchase.
  3. 3. Which alternative is more cost effective and by how much?
  4. 4. Now assume that 20% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more cost effective and by how much?

Expert Solution

1.

To determine

Describe the alternatives for Company F.

Explanation of Solution

Make-or-Buy Decisions:

The common problem that managers face is to decide whether to purchase a product from the supplier or to producethe same. The decisions which involve the choice between external production and internal production are known as make-or-buy decisions...

Expert Solution

2.

To determine

List the relevant costs of internal production and external purchase.

Expert Solution

3.

To determine

Evaluate which alternative is more cost effective and its amount.

Expert Solution

4.

To determine

Evaluate which alternative is more cost effective if 20% of the fixed overhead can be avoided.

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Chapter 8 Solutions

Managerial Accounting: The Cornerstone of Business Decision-Making
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