Question

Q1: Masse Corporation uses part G18 in one of its products. The company's Accounting Department reports the following costs of producing the 16,000 units of the part that are needed every year. Per Unit Direct materials..... $2.90 Direct labor $3.90 Variable overhead. $6.70 Supervisor's salary ................. $7.20 Depreciation of special equipment........ $8.30 Allocated general overhead. $5.40 An outside supplier has offered to make the part and sell it to the company for $28.00 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $22,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part G18 could be used to make more of one of the company's other products, generating an additional segment margin of $22,000 per year for that product. Required: Which alternative should the company choose? Q2: Part E43 is used in one of Ran Corporation's products. The company's Accounting Department reports the following costs of producing the 12.000 units of the part that are needed every year. Per Unit Direct materials..... $4.50 Direct labor.......... $1.20 Variable overhead........... $2.70 Supervisor's salary ........ $3.00 Depreciation of special equipment....... Allocated general overhead... $1.80 An outside supplier has offered to make the part and sell it to the company for $14.70 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $5,000 of these allocated general overhead costs would be avoided. $2.30 Required: b. Which alternative should the company choose?

Answer 1

Q1.

	Make	Buy
Direct materials	$46400	$0
Direct labour	$62400	$0
Variable overhead	$107200	$0
Supervisor's salary	$115200	$0
Depreciation of special equipment	$36800	$0
Allocated general overhead	$86400	$64400
Purchase price	$0	$448000
Opportunity cost	$22000	$0
Total cost	$476400	$512400
Difference in costs		$36000
Make or buy		Make

The company should make the product.

Q2.

	Make	Buy
Direct materials	$54000	$0
Direct labour	$14400	$0
Variable overhead	$32400	$0
Supervisor's salary	$36000	$0
Depreciation on special equipment	$27600	$0
Allocated general overhead	$21600	$16600
Purchase price	$0	$176400
Total cost	$186000	$193000
Difference in costs		$7000
Make or buy		Make

The company should make the product.

Q3.

	Keep U51Y	Drop U51Y
Sales	$980000	$0
Variable expenses	($568000)	$0
Fixed manufacturing expenses	($314000)	($34000)
Fixed selling and administrative expenses	($196000)	($56000)
Net operating income/(loss)	($98000)	($90000)

The net operating losses are less in case the company drops it. The product should be dropped.

Q4.

a.

	Keep N28X
Sales	$730000
Variable expenses	($336000)
Fixed manufacturing expenses	($256000)
Fixed selling and administrative expenses	($204000)
Net operating income/(loss)	($66000)

b.

	Drop N28X
Sales	$0
Variable expenses	$0
Fixed manufacturing expenses	($57000)
Fixed selling and administrative expenses	($90000)
Net operating income/(loss)	($147000)

The net losses are less if the product is continued. Thus, company should not drop the product.