Toys Direct manufactures miniature WWF wrestlers. 100,000 units are produced each year with production costs as follows:
Direct materials $450,000
Direct Labor 150,000
Variable support costs 350,000
Fixed support costs 250,000
Total costs $1,200,000
Toys Direct has the option of purchasing the miniature wrestlers from an outside supplier at $11.20 per unit. If the wrestler is outsourced, 40% of the fixed cost cannot be immediately converted to other uses.
Required:
a. Describe avoidable costs. What amount of the production cost is avoidable?
b. Should Toys Direct outsource the miniature wrestles? Why or why not?
c. What other items should Toys Direct consider before outsourcing any of the parts it currently manufactures?