Question

1)- Factor Co. can produce a unit of product for the following costs:

Direct material	$	8.70
Direct labor		24.70
Overhead		43.50
Total costs per unit	$	76.90

An outside supplier offers to provide Factor with all the units it needs at $44.45 per unit. If Factor buys from the supplier, the company will still incur 70% of its overhead. Factor should choose to:

2)- Maxim manufactures a cat food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $2.10 and total fixed costs are $10,000. The cat food can be sold as it is for $9.35 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,300 cost. The additional processing will yield 10,000 bags of Premium Green and 3,300 bags of Green Deluxe, which can be sold for $8.35 and $6.35 per bag, respectively. If Green Health is processed further into Premium Green and Green Deluxe, the total gross profit would be:

3)

Ahngram Corp. has 1,000 defective units of a product that cost $2.30 per unit in direct costs and $5.80 per unit in indirect cost when produced last year. The units can be sold as scrap for $3.30 per unit or reworked at an additional cost of $1.80 and sold at full price of $9.90. The incremental net income (loss) from the choice of reworking the units would be:

Answer 1

Existing total cost per unit = $76.90

cost per unit if offer is accepted = $44.45 + ($43.50 x 70%)

= $44.45 + $30.45 = $74.90

CONCLUSION:

as the cost per unit is less if the offer is accepted, Factor should choose to accept the offer and buy from the supplier.