Question

Question 3: Make versus buy You make refrigerators. Currently, you manufacture compressors for your refrigerators in-house. An outside supplier has offered to sell you equivalent compressors at a wholesale price of $65 per unit. You need 1,000 compressors per month. The internal production costs per compressor are as follows: cost per unit direct materials $20 direct labor $20 variable overhead $20 total If you outsource the production of compressors (the buy option) in the short term, how will this choice affect your costs and profit? First, compute variable costs under MAKE versus BUY: MAKE BUY unit VC total ve If you outsource (BUY), the incremental revenue, costs, and profit are: how much each amount changes if you outsource Incremental revenue Incremental VC Incremental CM Incremental FC Incremental profit Enter negative amounts with a minus sign, le 1.000 not ($1,000) Should you outsource? YES - outsourcing reduces costs by $5,000 O NO - outsourcing reduces profit by $5,000

Answer 1

3.

Variable cost = Direct material + Direct labor + Variable overhead

Total variable cost = Variable cost per unit X 1,000 units

	MAKE	BUY
Unit VC	$60	$65
Total VC	$60,000	$65,000

	how much each amount changes if you outsource
Incremental revenue	$0
Incremental VC	-$5,000
Incremental CM	-$5,000
Incremental FC	$0
Incremental profit	-$5,000

No - outsourcing reduces profit by $5,000.

4.

CM per hour = (Price - VC) / Machine hours

Basic = $3,600 per hour

Premium = $4,500 per hour

Supreme = $3,150 per hour

Premium product only.

Basic = 0 units

Premium = 150 units (300 / 2)

Supreme = 0 units