Question

Sheridan, Inc. currently manufactures a wicket as its main product. The costs per unit are as follows:

Direct materials and direct labor $13
Variable overhead 5
Fixed overhead 8
Total $26

Saran Company has contacted Sheridan with an offer to sell it 5900 of the wickets for $20 each. If Sheridan makes the wickets, variable costs are $18 per unit. Fixed costs are $8 per unit; however, $5 per unit is unavoidable.

Should Sheridan make or buy the wickets?

Answer 1

Answer

Sheridan should buy because doing so would save it $5900

Explanation

To determine the right course of action we will consider the relevant cost of making and buying

The relevant cost of making                                                $

Variable cost ( 18 ×  5,900                                             106200

Fixed cost   (3×  5,900)                                                     17700                  

Total cost                                                                       123,900

Relevant of buying (20 × 5,900 )                                 = 118,000

Saving in cost by buying = 123,900 -118,000 =$5900