Mammoth Earthmoving Manufactures Part WB23 Used in Several of Its

question 82

Essay

Mammoth Earthmoving manufactures part WB23 used in several of its truck models.10 000 units are produced each year with production costs as follows:
$$\begin{array} { l r } \text { Direct materials } & \$ 45000 \\\text { Direct manufacturing labour } & 15000 \\\text { Variable support costs } & 35000 \\\text { Fixed support costs } & \underline { 25000 } \\\quad \text { Total costs } & \underline{ \$ 120000 }\\\end{array}$$
Mammoth Earthmoving has the option of purchasing part WB23 from an outside supplier at $11.20 per unit.If WB23 is outsourced,40% of the fixed costs cannot be immediately converted to other uses.
a.Describe avoidable costs.What amount of the WB23 production costs is avoidable?
b.Should Mammoth Earthmoving outsource WB23? Why or why not?
c.What other items should Mammoth Earthmoving consider before outsourcing any of the parts it currently manufactures?
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Definitions:

Avoid

To keep oneself from doing something, or to prevent a particular outcome from happening.

Transaction

An instance of buying or selling something; a business deal or action.

Utmost Good Faith

A legal doctrine requiring parties in certain types of contracts, such as insurance, to act honestly and disclose all relevant information.