Question

3. Now suppose that if Summer purchases CMCBs from Manson, its best alternative use of the capacity currently used for CMCBs is to make and sell special circuit boards (CB3s) to the Eleanor Corporation. Summer estimates the following incremental revenues and costs from CB3s:

Answer 1

Ans.

1.

	Total manufacturing Cost of CMCB (a)	Manufacturing Cost per unit (b = a /4000 units)
Direct material ( 4000 * $ 160)	$         640,000.00	$            160.00
Direct manufacturing labor (4000 * $ 35)	$         140,000.00	$              35.00
Variable batch manufacturing cost ($ 1,300 * 40)	$           52,000.00	$              13.00
Fixed manufacturing cost
Avoidable fixed manufacturing costs	$         320,000.00	$              80.00
Unavoidable fixed manufacturing costs	$         240,000.00	$              60.00
Total Manufacturing Cost	$      1,392,000.00	$            348.00

2.

	Make		Buy
	Total	Per Unit	Total	Per Unit
Purchase Cost			$ 1,760,000.00	$ 440.00
Direct material ( 4000 * $ 160)	$      640,000.00	$                   160.00
Direct manufacturing labor (4000 * $ 35)	$      140,000.00	$                      35.00
Variable batch manufacturing cost ($ 1,300 * 40)	$        52,000.00	$                      13.00
Avoidable fixed manufacturing costs	$      320,000.00	$                      80.00
Total Relevant Cost	$ 1,152,000.00	$                   288.00	$ 1,760,000.00	$ 440.00

Summer should manufacture the units as there will be cost savings of $ 608,000 (1,760,000 - 1,152,000) as the cost of manufacture is less than the cost of purchase.

3.

	Choice for Summer
Relevant Items	Make CMCBs and do not make CB3s	Buy CMCBs and do not make CB3s	Buy CMCBs and make CB3s
Total Incremental Cost of
making/buying CMCBs	$ 1,152,000.00	$       1,760,000.00	$ 1,760,000.00
Excess of Future Cost over Future Revenue from CB3s	0	0	$      150,000.00
Total Relevant Cost	$ 1,152,000.00	$       1,760,000.00	$ 1,910,000.00

Summer will minimize manufacturing cost by making CMCBs and not making CB3s