The chateau company manufactures 4,000 telephones per year. the full manufacturing costs per telephone are as follows: direct materials $4 direct labor $16 variable manufacturing overhead $12 average fixed manufacturing overhead $12 total $44 the quick assembly company has offered to sell chateau 4,000 telephones for $31 per unit. if chateau accepts the offer, $20,000 of fixed overhead will be eliminated. chateau should:

It is better to buy and accept the offer.

Explanation:

Making cost :

Direct Material = cost × No. of telephones manufactures

                         = 4 × 4000

                         = 16,000

Direct Labour = cost × No. of telephones manufactures

                       = 16 × 4,000

                       = 64,000

Variable overhead = cost × No. of telephones manufactures

                               = 12 × 4000

                               = 48,000

Fixed overhead = cost × No. of telephones manufactures

                         = 12 × 4000

                         = 48,000

Total cost:

= Direct Material +  Direct Labour + Variable overhead +  Fixed overhead

= 16,000  + 64,000  + 48,000  + 48,000

= $176,000

Buy cost :

Purchase price = Per unit price × No. of telephones purchase

                         = 31 × 4000

                         = 124,000

Fixed overhead = Fixed overhead from making - fixed overhead eliminated

                          = 48,000 - 20,000

                          = 28,000

Total cost =  Purchase price + Fixed overhead

                = 124,000  + 28,000

                = 152,000

Therefore, it is better to buy and accept the offer.

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