Question

FORMATION FOR DECISION MAKING WITH A FOCUS ON OPEN 6-33 Make or Buy at Nantucket Nectars Assume that Nantucket Nectars reports the following costs to make 17.5 oz. bottles for its juice cocktails: Nantucket Nectars Company Cost of Making 17.5-Ounce Bottles Total Cost for 1,000,000 Bottles Cost per Bottle $ 80,000 Direct materials $.080 Direct labor 30,000 030 Variable factory overhead 60,000 060 Fixed factory overhead 85,000 ,085 $255,000 $.255 Total costs Another manufacturer offers to sell Nantucket Nectars the bottles for $.25. The capacity now used to make bottles will become idle if the company purchases the bottles. Further, one supervisor with a salary of $60,000, a fixed cost, would be eliminated if the bottles were purchased. Prepare a schedule that compares the costs to make and buy the 17.5 oz. bottles. Should Nantucket Nectars make or buy the bottles? 6-34 Make or Buy and the Use of Idle Facilities at Nantucket Nectars Refer to the preceding exercise. Suppose Nantucket Nectars can use the released facilities in another manufacturing activity that makes a contribution to profits of $75,000 or can rent them out for $55,000. Prepare a schedule that compares the four alternative courses of action. Which alternative would yield the lowest net cost?

please can you give a solution

Answer 1

6.33 Make of Buy Decision

Alternative-1 Particulars Make 1,000,000 bottles In-house Cost in $ Direct Materials Direct Labour Variable Factory Overhead Fixed Factory Overhead Net Cost 80000 30000 60000 85000 255000 Alternative-2 Particulars Buy from outside Cost in $ Purchase price Fixed Factory Overhead $85000 less $ 60000 (one Supervisor cost) Net Cost 250000 25000 275000

As we can see from the above analysis that the cost in Buy Decision is Higher for Buy decision, hence the company should make the goods in house.

6.34

Make or Buy Decision

Alternative-1 Particulars Make 1,000,000 bottles In-house Cost in $ Direct Materials Direct Labour Variable Factory Overhead Fixed Factory Overhead Net Cost 80000 30000 60000 85000 255000 Alternative-2 Particulars Buy from outside Cost in $ Purchase price Fixed Factory Overhead $85000 less $ 60000 (one Supervisor cost) Net Cost 250000 25000 275000

Make or Buy and use the idle Facilities

Alternative-3 Particulars Purchase price Fixed Factory Overhead $85000 less $ 60000 (one Supervisor cost) Buy from outside and Rent the Building Cost in $ 250000 25000 275000 55000 220000 Less Rent Received Net Cost Alternative-4 Particulars Buy from outside and Produce some other product in Factory Cost in $ Purchase price Fixed Factory Overhead $85000 less $ 60000 (one Supervisor cost) 250000 25000 275000 75000 60000 260000 Less: Contribution(Sales Less Variable Cost) from other product Add: Fixed Cost of one supervisor Salary Net Cost

Among all the four alternatives Alternative 3 that is buying from outside and renting out the building, provides the least net cost to the company so that one should be opted.