Structuring a Make-or-Buy Problem Fresh Foods, a large restaurant chain, needs to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each. Cost information on internal production includes the following: Direct materials Direct labor Variable manufacturing overhead. Variable marketing overhead Fixed plant overhead Total Cost Unit Cost $25,000 $5.00 15,000 3.00 7,500 1.50 8,500 1.70 30,000 6.00 $86,000 $17.20 Total Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price. If required, round your answers to the nearest whole number. Required: 1. What are the alternatives for Fresh Foods? Make the ingredient in house or buy it externally. 2. List the relevant cost(s) of internal production and of external purchase. All of the above 3. Which alternative is more cost effective and by how much? (Use total cost when giving your answer.) Make 87,000 4. 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? (Use total cost when giving your answer.) Buy $ * 78,000 Feedback Check My Work 1. and 2. The ingredient can be produced internally or purchased externally. 3. Relevant costs are future costs and differ across alternatives. Determine relevant costs for both alternatives. Set up four columns. First column lists all costs. Second and third columns are for alternatives, make or buy and list all amounts. Fourth column is the differential cost to make.