Question

The Svenson Corporation manufactures cellular modems. It manufactures its own cellular modem circuit boards​ (CMCB), an important part of the cellular modem. It reports the following cost information about the costs of making CMCBs in 2017 and the expected costs in 2018​:

	Current Costs	Expected Costs
	in 2017	in 2018
Variable manufacturing costs
Direct material cost per CMCB	$ 180	$ 170
Direct manufacturing labour cost per CMCB	50	45
Variable manufacturing cost per batch for setups, materials
handling, and quality control	1,600	1,500
Fixed manufacturing cost
Fixed manufacturing overhead costs that can be avoided if CMCBs
are not made	320,000	320,000
Fixed manufacturing overhead costs of plant depreciation,
insurance, and administration that cannot be avoided even if
CMCBs are not made	800,000	800,000

Sevenson manufactured 8,000 CMCBs in 2017 in 40 batches of 200 each. In 2018​, Svenson anticipates needing 10,000 CMCBs. The CMCBs would be produced in 80 batches of 125 each. The Minton Corporation has approached Svenson about supplying CMCBs to Svenson in 2018 at $300 per CMCB on whatever delivery schedule Svenson wants.

Requirement 1. Calculate the total expected manufacturing cost per unit of making CMCBs in

2018.

	Total Manufacturing	Manufacturing
	Costs of CMCB	Cost per Unit
Direct materials
Direct manufacturing labour
Variable batch manufacturing costs
Fixed manufacturing costs
Avoidable fixed manufacturing costs
Unavoidable fixed manufacturing costs
Total manufacturing costs

Enter any number in the edit fields and then click Check Answer.

Requirement 2. Suppose the capacity currently used to make CMCBs will become idle if

Svenson purchases CMCBs from

Minton. On the basis of financial considerations​ alone, should

Svenson make CMCBs or buy them from

Minton​? Show your calculations. ​(If a box is not used in the​ table, leave the box​ empty; do not enter a​ zero.)

	Make		Buy
	Total	Per Unit	Total	Per Unit
Avoidable fixed manufacturing costs*
Direct materials*
Avoidable fixed manufacturing costs*
Direct manufacturing labour**
Variable batch manufacturing costs*
Total relevant costs*

Answer 1

per Unit Requirement 1 | Calculation of the Total Expected Manufacturing Cost per Unit Particulars Calculation Amount ($) Direct Materials 10,000 CMCBs @ $ 170 per Unit $ 1,700,000 $ Direct Labor 10,000 CMCBs @ $ 45 per Unit $ 450,000 $ Variable Manufacturing Cost 80 Batches @ $ 1,500 per Batch $ 120,000 $ Total Variable Cost $ 2,270,000 $ 170 45 12 227 Avoidable Fixed Cost Unavoidable Fixed Cost Total Fixed Cost Given Given $ $ $ 320,000 $ 800,000 $ 1,120,000 $ 32 80 112 Total Manufacturing Cost $ 2,270,000 + $ 1,120,000 $ 3,390,000 $ 339 Requirement 2 If the Units are to be purchased from the third party, then the cost considerations shall be as follows: Make Particulars Calculation Total Per Unit Purchase Cost 10,000 CMCBs @ $ 300 per Unit Buy Total 3,000,000 $ Per Unit 300 $ Direct Materials Direct Labor Variable Manufacturing Cost Total Variable Cost 10,000 CMCBs @ $ 170 per Unit $ 10,000 CMCBs @ $ 45 per Unit $ 80 Batches @ $ 1,500 per Batch $ $ 1,700,000 $ 450,000 $ 120,000 $ 2,270,000 $ 170 45 12 227 $ 3,000,000 $ 300 Given $ Avoidable Fixed Cost Total Fixed Cost $ $ 320,000 320,000 32 32 $ $ $ $ Total Cost $ 2,270,000 + $ 320,000 $ 2,590,000 $ 259 $ 3,000,000 $ 300 If the CMCBs are purchased from outside, the Incremental Loss will be $ 410,000 ($ 3,000,000 - $ 2,590,000). Therefore, it is advisable to Make the Product instead of buying.