Vaughn Manufacturing produces corn chips. The cost of one batch is below: Direct materials $17 Direct labor 12 Variable overhead 10 Fixed overhead 14 An outside supplier has offered to produce the corn chips for $27 per batch. How much will Vaughn Manufacturing save if it accepts the offer?

$26.00 per batch .

Explanation:

Consider the costs and savings per batch that arise if Vaughn accepts the offer.

Analysis of Costs and Savings

Purchase Cost            ($27.00)

Savings :

Direct materials            $17.00

Direct labor                   $12.00

Variable overhead       $10.00

Fixed overhead            $14.00

Total Savings               $26.00

Therefore if Fixed overheads are avoidable, the savings would be $26.00 per batch .

Vaughn Manufacturing will save $12  if it accepts the offer

Explanation:

We need to calculate the manufacturing cost of the product and then compare it to the purchase price and the fixed cost after purchase.

Manufacturing Cost:

Direct Material         $17

Direct Labor             $12

Variable Overhead  $10

Fixed Overhead      $14

Total cost                $53

Purchasing cost:

Purchase price           $27

Fixed overhead cost  $14  

Total cost                    $41

Saving = Manufacturing cost - Purchase cost = $53 - $41 = $12

As we know that the fixed overhead cost does not vary with the change in the production or sales activity and it cannot be avoided because it has to incurred even the chips is purchase from the outside supplier. Vaughn Manufacturing will save $12  if it accepts the offer.