Davis Kitchen Supply produces stoves for commercial kitchens. The costs to manufacture and market the stoves at the company's normal volume of 6,000 units per month are shown in the following table:

Unit manufacturing costs

Variable materials $ 53

Variable labor 78

Variable overhead 28

Fixed overhead 63

Total unit manufacturing costs $ 222

Unit marketing costs

Variable 28

Fixed 73

Total unit marketing costs 101

Total unit costs $ 323

Unless otherwise stated, assume that no connection exists between the situation described in each question; each is independent. Unless otherwise stated, assume a regular selling price of $376 per unit. Ignore income taxes and other costs that are not mentioned in the table or in the question itself.

A) A proposal is received from an outside contractor who will make and ship 2,000 stoves per month directly to Davis's customers as orders are received from Davis's sales force. Davis's fixed marketing costs would be unaffected, but its variable marketing costs would be cut by 20 percent for these 2,000 units produced by the contractor. The idle facilities would be used to produce 1,600 modified stoves per month for use in extreme climates. These modified stoves could be sold for $453 each, while the costs of production would be $278 per unit variable manufacturing expense. Variable marketing costs would be $53 per unit. Fixed marketing and manufacturing costs would be unchanged whether the original 6,000 regular stoves were manufactured or the mix of 4,000 regular stoves plus 1,600 modified stoves were produced. What in-house unit cost should be used to compare with the quotation received from the outside contractor? Assume the payment to the outside contractor is $218.

Answer rating: 100% (QA)

Inhouse Unit Cost Comparison for Davis Kitchen Supply Davis Kitchen Supply is considering an offer from an outside contractor to produce 2000 stoves p... View the full answer