Sanders Toys Is Beginning to Manufacture Bungey Wagons The Company Has Contacted a Number of Suppliers to Determine

Multiple Choice

Sanders Toys is beginning to manufacture Bungey Wagons. The product will be sold to toy store chains for $12 each. Management allocates $120,000 of fixed manufacturing overhead costs to Bungey Wagons. The manufacturing cost for each wagon at the expected production of 10,000 wagons is as follows: $\begin{array}{lr}\text { Direct material } & \$ 13.00 \\\text { Direct labor } & 4.00 \\\text { Overhead ( } \$ 1.20 \text { fixed and } \$ 2.00 \text { variable) } & 3.20 \\\text { Total } & \$ 20.20\end{array}$ The company has contacted a number of suppliers to determine whether it is better to buy or manufacture the wheels. The lowest quote for a set of 4 wheels needed for each wagon is $3.15. It is estimated that purchasing the wheels from a supplier will save 10 percent of direct materials, 20 percent of direct labor, and 15 percent of variable overhead. Sanders Toys' manufacturing space is highly constrained. By purchasing the wheels, the company will not have to lease additional manufacturing space that currently cost $8,000 per year. What is the incremental cost or benefit of buying the wheels as opposed to making them?

A) $500 net benefit
B) $7,500 net cost
C) $14,500 net cost
D) None of these answer choices are correct.