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.With all other things constant, if Geary Manufacturing is able to reduce the direct materials for an electric mixer to $6 a per unit, the company should
Answer(s): A
Reducing unit direct materials cost for mixers from $11 to $6 decreases unit variable cost to $ 27 ($6 DM + $9 DL + $12 VOH) and increase the cost savings of making a mixer from $6 to $11. or $5.50 per hour ($11÷ 2 hours per unit). Given a cost savings per hour for blenders of $4, the company can minimize total variable cost by making 25,000 mixers (50,000 hours capacity ÷ 2). Total variable cost will be $1,189,000 [(25,000 mixers x $27) + ( 3,000 mixers x $ 38) + (20,000 blenders x $20)].
Pontotoc Industries manufactures a product that is used as a subcomponent by other manufacturers. It has the following price and cost structure:Pontotoc received a special, one-time order for 1,000 of the above parts. Assuming Pontotoc has excess capacity, the minimum unit price for this special, one-time order is in excess of
Answer(s): C
In a special order situation, a company with excess capacity has a $0 opportunity cost of filling the special order. Accordingly, it should be willing to sell the product at a price that exceeds its incremental costs The incremental (relevant) costs for Pontotoc equal the variable costs of SIOC (S40 direct materials + S30 direct labor + $24 variable overhead + $6 variable selling costs). Thus, if the selling price is in excess of $100, the company should be willing to accept the order.
Pontotoc Industries manufactures a product that is used as a subcomponent by other manufacturers. It has the following price and cost structure:Pontotoc received a special, one-time order for 1,000 units of its product. However, Pontotoc has an alternative use for this capacity that will result in a contribution of $20,000. The minimum unit price for this special, onetime order is in excess of
Answer(s): D
Incremental (relevant) costs include the variable costs of $100 ($40 direct materials + $30 direct labor + $24 variable overhead + $6 variable selling costs). Furthermore, if the company does not have idle capacity, the unit price must cover the opportunity costs as well as the variable costs. Given that the alternative use will generate a $20,000 contribution, the 1,000 special-order units will have be generate at least $20 per unit ($20,000 ÷ 1,000 units) above their variable costs, a total of $120 per unit.
A company has 7,000 obsolete toys carried in inventory at a manufacturing cost of $6 per unit. If the toys are reworked for $2 per unit, they could be sold for $3 per unit. If the toys are scrapped, they could be sold for $1.85 per unit. Which alternative is more desirable (rework or scrap), and what is the total dollar amount of the advantage of that alternative?
The original manufacturing cost of $6 per unit is a sunk cost that is not relevant to this decision. The relevant costs are the amounts that must be expended now. Hence, selling the toys for scrap has a $5,950 advantage because rework will produce an additional $7,000 [7,000 x ($3-- $2)], whereas the alternative generates an additional $12,950 (7,000 x $1.85).
A company's approach to an insourcing vs. outsourcing decision
Answer(s): B
Available resources should be used as efficiently as possible before outsourcing. If the total relevant costs of production are less than the cost to buy the item, it should be produced in-house. The relevant costs are those that can be avoided.
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