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:

Variance

A statistical measure that represents the dispersion or spread of a set of data points or investment returns around their mean or average value.

Total Rate of Return

A measure of the total gain or loss on an investment over a specified period, including both capital gains and dividends or interest.

Total Dollar Return

The overall financial gain or loss on an investment, expressed in dollars, including dividends, interest, and capital gains.

Dividend Payments

Cash payments made by a company to its shareholders as a distribution of profits.