Gordon Corporation produced 10,000 digital watches in the current year. Variable costs are $8 per watch. Overhead assigned is $2.25 per watch. A supplier offers the watches for $9.50 each. Gordon's production manager reports the incremental overhead is $1.25 per watch. Gordon should:Multiple ChoiceContinue making the watches as an additional $1.50 per watch would be incurred if bought from the supplier.Continue making the watches as an additional $0.25 per watch would be incurred if bought from the supplier.Buy the watches as they would save $0.75 per watch.Buy the watches as they would save $1.50 per watch.Buy the watches as they would save $1.75 per watch.
Question
Gordon Corporation produced 10,000 digital watches in the current year. Variable costs are 2.25 per watch. A supplier offers the watches for 1.25 per watch. Gordon should:Multiple ChoiceContinue making the watches as an additional 0.25 per watch would be incurred if bought from the supplier.Buy the watches as they would save 1.50 per watch.Buy the watches as they would save $1.75 per watch.
Solution
To answer this question, we need to compare the cost of producing the watches in-house versus buying them from the supplier.
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Calculate the total cost of producing the watches in-house: Variable costs: 10,000 watches * 80,000 Overhead costs: 10,000 watches * 22,500 Total production cost = Variable costs + Overhead costs = 22,500 = $102,500
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Calculate the total cost of buying the watches from the supplier: Cost of buying: 10,000 watches * 95,000 Incremental overhead: 10,000 watches * 12,500 Total cost of buying = Cost of buying + Incremental overhead = 12,500 = $107,500
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Compare the two costs: The total cost of producing the watches in-house (107,500).
Therefore, the correct answer is: "Continue making the watches as an additional $0.50 per watch would be incurred if bought from the supplier."
Similar Questions
Item 7Gordon Corporation produced 10,000 digital watches in the current year. Variable costs are $8 per watch. Overhead assigned is $2.25 per watch. A supplier offers the watches for $9.50 each. Gordon's production manager reports the incremental overhead is $1.25 per watch. Gordon should:Multiple ChoiceContinue making the watches as an additional $1.50 per watch would be incurred if bought from the supplier.Continue making the watches as an additional $0.25 per watch would be incurred if bought from the supplier.Buy the watches as they would save $0.75 per watch.Buy the watches as they would save $1.50 per watch.Buy the watches as they would save $1.75 per watch.
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