Question

Baird Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Baird produces a relatively small amount (17,000 units) of the cream and is considering the purchase of the product from an outside supplier for $4.70 each. If Baird purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Baird's accountant constructed the following profitability analysis: Revenue (17,000 units x $11.00) Unit-level materials costs (17,000 units X $1.60) Unit-level labor costs (17,000 units x $0.70) Unit-level overhead costs (17,000 * $0.30) Unit-level selling expenses (17,000 X $0.40) Contribution margin Skin cream production supervisor's salary Allocated portion of facility-level costs Product-level advertising cost Contribution to companywide income $ 187,000 (27,200) (11,900) (5,100) (6,800) 136,000 (48,000) (11,800) (39,000) $ 37,200 Required a. Identify the cost items relevant to the make-or-outsource decision. b. What is the avoidable cost per unit if the outsourcing decision is taken? Should Baird continue to make the product or buy it from the supplier? c. Suppose that Baird is able to increase sales by 10,000 units (sales will increase to 27,000 units). Calculate the total avoidable costs. At this level of production, should Baird make or buy the cream? Complete this question by entering your answers in the tabs below. Required A Required B Required C Identify the cost items relevant to the make-or-outsource decision. Total avoidable costs

Answer 1

Baird Chemical Company Requirement a & b Avoidable Production costs: Unit level material cost (17000 *1.6) Unit level labor costs (17000 *0.7) Unit level overhead costs (17000*0.3) Skin cream production supervisor's salary Total Avoidable costs 27200 11900 5100 48000 92200 Total Avoidable costs per unit (92200/17000) 5.42 per unit Since the purchase of Product from outside supplier is $4.70 which is less than the cost of production per unit. Thus Baird should buy the product from outside supplier. Requirement c Calculation of Avoidable costs if sales increases to 27000 units Unit level material cost (27,000 *1.6) Unit level labor costs (27000*0.7) Unit level overhead costs (27000*0.3) Skin cream production supervisor's salary Total Avoidable costs Total cost to Purchase ( 27000*4.70) Incremental cost on Purchase 43200 18900 8100 48000 118200 126900 8700 At this level of production, the cost of purchase is more by $8700 Hence Rooney should produce the product at this level.