Tool Time Manufactures Carpenter-Grade Screwdrivers

question 3

Multiple Choice

Tool Time manufactures carpenter-grade screwdrivers.The company is trying to decide whether to continue to make the case in which the screwdrivers are sold, or to outsource the case to another company.The direct material and direct labor cost to produce the cases total $2.00 per case.The overhead cost is $1.00 per case which consists of $0.40 in variable overhead that would be eliminated if the cases are bought from the outside supplier.The $0.60 of fixed overhead is based on expected production of 200,000 cases per year and consists of the salary of the case production manager of $40,000 per year, along with the remainder consisting of rent, insurance, and depreciation on equipment that will have no resale value.The manager will be laid off if the cases were bought externally.The outside supplier has offered to supply the cases for $2.80 each.How much will Tool Time save or lose if the cases are bought externally?

• A)Save $0.40 per case
• B)Lose $0.20 per case
• C)Lose $0.80 per case
• D)Save $0.20 per case

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Definitions:

Physical Movement

The actual movement or transportation of goods in a supply chain.

Average Cost Flow

An inventory costing method that assigns the average cost of goods available for sale to both ending inventory and cost of goods sold.

Ending Inventory

The value of goods available for sale at the end of an accounting period, calculated by adding purchases to the beginning inventory and subtracting goods sold.

LIFO

Last In, First Out; an inventory valuation method where the most recently produced items are recorded as sold first.