Gordon Corporation produced 10,000 digital watches in the current year. Variable costs are $8 per watch. Overhead assigned is $2.25 per watch. A supplier offers the watches for $9.50 each. Gordon's production manager reports the incremental overhead is $1.25 per watch. Gordon should

Gordon Corporation produced 10,000 digital watches in the current year. Variable costs are $8 per watch. Overhead assigned is $2.25 per watch. A supplier offers the watches for $9.50 each. Gordon's production manager reports the incremental overhead is $1.25 per watch. Gordon should:

Multiple Choice

Buy the watches as they would save $1.50 per watch.


Buy the watches as they would save $0.75 per watch.


Continue making the watches as an additional $1.50 per watch would be incurred if bought from the supplier.


Buy the watches as they would save $1.75 per watch.


Continue making the watches as an additional $0.25 per watch would be incurred if bought from the supplier. Correct

 
Explanation
Incremental costs if make: $8 variable costs + $1.25 incremental overhead = $9.25
Costs to buy: $9.50
Cost savings to make: $9.25 − $9.50 = ($0.25)