Koshka produces corn chips. The cost of one batch is below: Direct materials $18.00 Direct labor 13.00 Variable overhead 11.00 Fixed overhead 14.00 An outside supplier has offered to produce the corn chips for $25 per batch. How much will Koshka save if it accepts the make or buy offer

Koshka

If Koshka accepts the make or buy offer, it will save $17 per batch.

Explanation:

a) Data and Calculations:

Cost of making corn chips per batch:

Direct materials   $18.00

Direct labor            13.00

Variable overhead 11.00

Fixed overhead    14.00

Total costs        $56.00

Relevant costs of making the corn chips batch in-house:

Direct materials         $18.00

Direct labor                  13.00

Variable overhead       11.00

Total variable costs $42.00

Relevant cost of buying from the outside supplier per batch = $25

Savings = $17 ($42 - $25)

b) Fixed overhead is not a relevant cost because it will still be incurred whether Koshka makes or buys the corn chips batch.  The relevant costs are the costs that will change as a result of the choice made.

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