Fresh foods needs to determine if it would be cheaper to produce 5,000 units of its main food ingredient in house or to purchase them from a supplier for $12 each. Cost information on internal production includes the following:

Total cost Unit Cost

Direct Materials $25,000 $5

Direct Labor 15,000 3

Variable manufacturing overhead 18,500 3.70

Fixed plant overhead 30,000 6

Total $88,500 17.70

1. Assume that fixed overhead will continue whether the ingredient is produced internally or externally. Which alternative is more cost effective and by how much?

2. Now assume that 20% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more cost effective and by how much?