Toy Corporation's best selling product is a teddy bear that wears overalls. The accounting department reports the following costs of producing the overalls that are needed every year to dress the toy bear.

An outside supplier has offered to make the overalls and sell it to the company. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the overalls was purchases many years ago and has no salvage value or any other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, some of these allocated general overhead costs would be avoided. In addition, the space used to produce the overalls could be used to make other toys generating additional segment margin per year for that product.

Outside supplier's price per unit                                      $ 5.75

Total avoidable general overhead costs per year         $ 4,500

Total additions segment margin per year                      $ 17,000

What are the annual relevant costs the company can save if they do not make the overalls?

What are the annual relevant costs (net of benefits) the company will incur if it purchases the overalls?

Should the company continue to make the overalls or buy them from the outside supplier?

○ Make

○ Buy