Question

help with these exercises please

3 Your Company makes 8000 units of a component part. At this level of activity, the cost per part is: Direct materials $3.00 Direct labor $4.00 Variable manufacturing overhead $2.00 Fixed manufacturing overhead $6.00 Total cost per part $15.00 An outside supplier has offered to sell the parts to Your Co. for $12 each. If Your Co. accepts this offer, it will be able to increase production of another product and earn an additional $24000 profit. Of the fixed manufacturing overhead, 60% is allocated and 40% direct. Complete the following table to determine whether you should make or buy the part. Buy So Make $24,000 $32,000 $16,000 $48,000 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Purchase price Opportunity cost Total cost $o So $28,800 $96,000 $0 $24,000 What is the difference in cost? Should you make or buy the part?

Answer 1

	Make	Buy
Direct materials	$24000	$0
Direct labour	$32000	$0
Variable manufacturing overhead	$16000	$0
Fixed manufacturing overhead	$48000	$28800
Purchase price	$0	$96000
Opportunity cost	$24000	$0
Total cost	$144000	$124800
Difference in cost		$19200
Make or buy		Buy

	Keep B	Drop B
Contribution margin	$240	($240)
Advertising expenses	($80)	$80
Depreciation of special equipment	($72)	$72
Salaries of segment manager	($128)	$128
Indirect fixed costs	($80)	$80
Net operating income/(loss)	($120)	$120
Incremental profit/(loss)		$240
Keep B or drop B		Drop B

	Make	Buy
Direct materials	$22400	$0
Direct labour	$11200	$0
Variable manufacturing overhead	$16800	$0
Fixed manufacturing overhead	$39200	$27440
Purchase price	$0	$78400
Opportunity cost	$8960	$0
Total cost	$98560	$105840
Difference in cost		$7280
Make or buy		Make

	Product A	Product B	Product C
Sales	$160	$200	$240
Variable cost	$96	$111.92	$144
Contribution margin	$64	$88.08	$96
Direct labour required (hrs)	2	3	4
Contribution per hr	$32	$29.36	$24
Ranking in terms of profitability	1	2	3

First we allocate labour hours for A as it is most profitable and we try to make maximum units of A. We make 640 units of A and spend 1280 hrs. Then we make B of 1280 units and spend another 3840 hrs. The remaining hours (7200-1280-3840) = 2080 hours are given to C. Product C produced with 2080 hours = 2080/4= 520 units.

	Product A	Product B	Product C
Most profitable sales mix (units)	640	1280	520