Outsourcing: alternative use of capacity (Learning Objective 6)

Morning Grain makes organic cereal. Costs of producing 140,000 boxes of cereal each year follow:

Suppose Kellogg’s will sell Morning Grain the cereal for $4 a box. Morning Grain would also pay $0.19 a box to transport the cereal to its warehouse.
Requirements 1. Morning Grain’s accountants predict that purchasing the cereal from Kellogg’s will enable the company to avoid $140,000 of fixed overhead. Prepare an analysis to show whether Morning Grain should make or buy the cereal.
2. Assume that the Morning Grain facilities freed up by purchasing the cereal from Kellogg’s can be used to manufacture snack bars that will contribute $180,000 to profit. Total fixed costs will be the same as if Morning Grain used the plant to make cereal. Prepare an analysis to show which alternative makes the best use of Morning Grain’s facilities:

(a) make cereal,

(b) buy cereal and leave facilities idle, or

(c) buy cereal and make snack bars.

Transcribed Image Text:

Direct materials....... Direct labor......... Variable overhead... Fixed overhead........... Total manufacturing costs....... $220,000 140,000 60,000 440,000 $860,000