Healthy Grain, Inc., makes organic cereal. Cost data for producing 140,000 boxes of cereal each year are as follows:

Suppose General Mills will make the cereal and sell it to Healthy Grain for \(\$ 4\) a box. Healthy Grain also would pay \(\$ 0.20\) a box to transport the cereal from General Mills to Healthy Grain's warehouse.

Requirements 

1. Healthy Grain's accountants predict that purchasing the cereal from General Mills will enable the company to avoid \(\$ 130,000\) of fixed overhead. Prepare an analysis to show whether Healthy Grain should make or buy the cereal.

2. Assume that the Healthy Grain's facilities freed up by purchasing the cereal from General. Mills can be used to manufacture cereal bars that will contribute \(\$ 180,000\) to profit. Total fixed costs will be the same as if Healthy Grain used the plant to make cereal. Prepare an analysis to show which alternative makes the best use of Healthy Grain's facilities:

(a) make cereal,

(b) buy cereal and leave facilities idle,

(c) buỵ cereal and make cereal bars.

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Direct materials Direct labor Variable overhead Fixed overhead Total manufacturing costs $220,000 140,000 60,000 430,000 $ 850.000