Answer to Question #59215 in Microeconomics for TRAN VAN DAT
Cost information on internal production includes the following:
Total Cost Unit Cost
Direct materials 10,000 1.00
Direct labour 20,000 2.00
Variable overheads 8,000 0.80
Fixed overheads 44,000 4.40
Total 82,000 8.20
Fixed overhead will continue whether the component is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price.
b. Which alternative is more cost effective and by how much?
c. Now assume that the fixed overhead includes $10,000 of cost that can be avoided if the component is purchased externally. Which alternative is more cost effective and by how much?
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