Question

You own Air-Pro Company, which makes 8,000units of Atmos-trons per year. The per-unit manufacturing costs o Atmos-Trons are as follows:

Direct Materials $16.00

Direct Labor (variable cost) $20.00

Manufacturing Overhead: $18.00

An outside company has offered to sell you the same Atmos-Trons units. They would supply all 8000 units annually and would charge you $49.25.

If you accept the offer (and stop making the Atmos-Trons) all the per unit manufacturing costs would be avoided EXCEPT for $7 per unit of the manufacturing overhead which will remain (it is related to the supervisors fixed salary; that supervisor will be reassigned into some admin department with Air-Pro)

Based on managerial accounting, should you accept the offer and discontinue making the Atmos-Trons and instead but from out side?

What would be the (single dollar amount) effect on the annual net income if you accept the offer? (show calculatioms)

Price Per unit:

Answer 1

Req 1 No, we should not accept the offer and discontinue making the Atmos-Trons. We should continue making Atmos-Trons instead of buying from outside Req 2 Net Income decrease by $ 24,000 Notes: In Managerial accounting, while taking make or buy decisions, we should consider only relevant costs. Option A: Total cost of purchase: $ 49.25*8,000 Units = $ 394,000 Option B: Total cost if we manufacture: $47.00*8,000 units = $ 376,000 Manufacture Cost = (Direct material - $ 16+ Direct labour - $ 20 + Avoidable Manfuturing Overhead - $ 11 ($ 18 - $ 7)) = $ 47 By considering the two alternatives it is better to manufacture the product by own, as the cost of manufacturing is low compared to purchase. If we accept the offer the annual net income decreases by $ 18,000 ($ 394,000 - $376,000) Let me know, if you have any questions over comments section, rate positive if you are satisfied with the solution