Question

Use the information for the following TWO questions Red Flag, Inc. currently produces Kids Scooters for sales under its own logo. They are also making the wheels that are the part of the final product. The costs of producing 5,000 wheels are listed below. Direct materials Direct labor Variable manufacturing overhead Supervisor salary Depreciation of the machine Allocated factory-level costs Total Production Costs $30,000 22,000 4,000 8,900 10,000 18,000 92.900 The company has recently received an offer from an outside supplier to sell the wheels for $12 per unit. The company is considering whether they should make or buy the wheels. If the wheels are not produced, the supervisor will have more time to work on the other parts of the production, and the salary will not be affected. The machine was purchased long time ago and will not have any other uses or any re-sale value. In addition, the company's accounting department has determined that they can avoid 20% of the allocated factory-level costs if they buy. 3. If Red Flag purchases the wheels, what is the impact on profit and should Red Flag purchase from the outside supplier? 4. Upon further analysis, the company has determined that they can rent their manufacturing space for $5,000 if they decide to buy from the outside supplier. What is the impact on profit and should Red Flag purchase from the outside supplier and rent out the space?

Answer 1

B2 - AB H make internally direct materials direct labor variable manufacturing overhead supervisor salary depreciation of the machine allocated factory level costs purchase price total costs $ 30,000 $ 22,000 $4,000 $ 8,900 $ 10,000 $ 18,000 $0 $ 92,900 purchase from outside supplier $0 $0 SO $ 8,900 $ 10,000 $ 14,400 $ 60,000 $ 93,300 since in purchase from outside supplier option, the total cost has increased by $400, we car say that the impact on profit would be $400 decrease if red flags are purchased from outside supplier. impact on profit = $ 400 decrease decision - the company should not purchase from outside supplier. reason - because the profit is decreasing by $400 4 decrease in profit if purchased from outside supplier rental revenue of the manufacturing space impact on profit = -$ 400 $5,000 $ 4,600 increase decision - the company should purchase from outside supplier. reason - because the profit is increasing by $4,600

for formulas and calculations, refer to the image below -

D H make internally purchase from outside supplier direct materials 30000 direct labor 22000 variable manufacturing overhead 4000 supervisor salary 8900 depreciation of the machine 10000 allocated factory level costs 18000 purchase price total costs =SUM(D3:09) =D6 =D7 D8*80% =5000*12 =SUM(E3:E9) since in purchase from outside supplier option, the total cost has increased by $400, we can say that the impact on profit would be $400 decrease if red flags are purchased from outside supplier. 400 decrease impact on profit = decision - the company should not purchase from outside supplier. reason-because the profit is decreasing by $400 decrease in profit if purchased from outside supplier rental revenue of the manufacturing space impact on profit = -400 5000 =F17+F18 increase decision - the company should purchase from outside supplier. reason - because the profit is increasing by $4,600

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