Gordon Corporation produced 10,000 digital watches in the current year.Variable costs are $8 per watch.Overhead assigned is $2.25 per watch.A supplier offers the watches for $9.50 each.Gordon's production manager reports the incremental overhead is $1.25 per watch.Gordon should:
A)Continue making the watches as an additional $1.50 per watch would be incurred if bought from the supplier.
B)Continue making the watches as an additional $0.25 per watch would be incurred if bought from the supplier.
C)Buy the watches as they would save $0.75 per watch.
D)Buy the watches as they would save $1.50 per watch.
E)Buy the watches as they would save $1.75 per watch.

Question

Quizplus · Accepted Answer

The total cost to produce a watch is $8 (variable costs) + $2.25 (overhead) = $10.25. The supplier offers watches at $9.50 each, but the incremental overhead of $1.25 per watch would still be incurred, making the effective cost of buying $10.75 ($9.50 + $1.25). Therefore, it's cheaper to continue making the watches, as buying them would result in an additional $0.25 cost per watch.

Gordon Corporation Produced 10,000 Digital Watches in the Current Year