In a make-versus-buy decision, the relevant costs include variable manufacturing costs as well as
Answer(s): C
The relevant costs in a make-versus-buy decision are those that differ between the two decision choices. These costs include any variable costs plus any avoidable fixed costs. Avoidable fixed costs will not be incurred if the "buy" decision is selected.
Laurel Corporation has its own cafeteria with the following annual costs:If production of this engine were discontinued1 the production capacity would be idle, and the supervisor would be laid off. When asked to bid on the next contract for this engine, the minimum unit price that Power Systems should bid is
Answer(s): D
The company will need to cover its variable costs and any other incremental costs. Thus, direct materials ($200,000), direct labor ($150,000), the supervisor's salary ($20,000), and fringe benefits on direct labor ($15,000) are the incremental unit costs of manufacturing the engines. The breakeven price is therefore $385,000 ($200,000 + $150,000 + $20,000 + $15,000).
Laurel Corporation has its own cafeteria with the following annual costs:The company must decide to continue making the product or buy it from an outside supplier. The supplier has offered to make the product at the same level of quality that the company can make it. Fixed marketing costs would be unaffected, but variable marketing costs would be reduced by 30% if the company were to accept the proposal. What is the maximum amount per unit that the company can pay the supplier without decreasing operating income?
Answer(s): B
The key to this question is, what costs will the company avoid if it buys from the outside supplier? It will no longer incur the $2.00 of direct materials, nor the $240 of direct labor, nor the $1.60 of variable overhead, nor $0.75 ($2.50 x 30%) of the variable marketing costs (regardless of whether the company makes or buys, it will still incur 70% of the variable marketing costs). The firm will therefore avoid costs of $6.75 ($2.00 + $240 +$1.60 +$0.75). Hence, it will at least break even by paying no more than $6.75.
Power Systems. Inc. manufactures jet engines for the United States armed forces on a cost-plus basis. The cost of a particular jet engine the company manufactures is shown as follows:sus-buy decision, the relevant costs include variable manufacturing costs as well as
Geary Manufacturing has assembled the data appearing in the next column pertaining to two products. Past experience has shown that the unavoidable fixed manufacturing factory overhead included in the cost per machine hour averages $10. Geary has a policy of filling all sales orders, even if it means purchasing units from outside suppliers. Total machine capacity is 50,000 hours.If Geary Manufacturing desires to follow an optimal strategy, it should produce a
Sales (20,000 blenders and 28,000 mixers) and total revenue are constant, so the strategy is to minimize total variable cost. Each blender requires 1 machine hour($16 OH ÷ $16 per hour), and each mixer requires 2 machine hours ($32OH ÷$ 16 per hour). For blenders, the unit variable cost is $16 ($6 DM + $4DL + $6 VOH). For each blender made, the company saves $4 ($20-$16), or $4($4 ÷ 1 hr.). per unit of the constrained resource. The unit variable cost to make a mixer is $32($11 DM + $9 DL + $12 VOH). The savings is $6 per mixer ($38-$32), or $3 ($6 ÷ 2 hours) per unit of the constrained resource. Thus, as many blenders as possible should be made. If 20,000 hours (20,000 units x 1 hours) are used for blenders, 30,000 hours are variable for 15,000 mixers. Total variable cost will be $1,294,000 [20,000 blenders x $16) + (15,000 mixers x $32) + (13,000 mixers x $38)].
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