Back Porch Company manufactures lawn chairs using an activity-based costing system to allocate all manufacturing conversion costs. The following information is provided for the month of June:
Activity Estimated Indirect Activity Costs Allocation Base Estimated Quantity of Allocation Base
Materials handling $12,000 Number of parts 12,000 parts
Assembling $16,800 Number of parts 12,000 parts
Packaging $4,500 Number of lawn chairs 1,500 lawn chairs
Each lawn chair consists of 8 parts; the total direct materials cost per lawn chair is $10.00.
If the cost to purchase the same lawn chair from a supplier is $35.00, what should Back Porch do to maximize profits?
A) Since the cost to manufacture the lawn chair is also $32.20, the company would make the same profit whether it bought the lawn chair or manufactured it.
B) Continue to manufacture the lawn chair.
C) Purchase the lawn chair from the supplier.
D) Close down the business.