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11 February, 11:36

Wilson Corporation produces a large number of fishing products. The costs per unit of a particular fishing reel are as follows. Direct materials and direct labor $ 10 Variable factory overhead 6 Fixed factory overhead 4 The company recently decided to buy 10,000 fishing reels from another manufacturer for $18 per unit because "it was cheaper than our cost of $20 per unit." Is the decision made by Wilson's management correct or not? Correct Incorrect

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  1. 11 February, 13:15
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    The decision is incorrect. It is cheaper to make in house.

    Explanation:

    Giving the following information:

    Make in house:

    Direct materials and direct labor 10

    Variable factory overhead 6

    Fixed factory overhead 4

    The company recently decided to buy 10,000 fishing reels from another manufacturer for $18

    We need to calculate the unitary variable cost of production. Fixed costs are unavoidable, therefore they shouldn't be taken into account.

    Variable cost = direct material + direct labor + variable overhead

    Variable cost = 10 + 6 = $16

    The decision is incorrect. It is cheaper to make in house.
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