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Porcelain Fused to Metal All Porcelain Direct materials Direct labor Variable overhead Fixed overhead Total $190 50 25 60 $325 $ 80 20 5 40 $145 Fixed overhead is detailed as follows: Salary (supervisor) Depreciation Rent (lab facility) $30,000 8,000 22.000 Overhead is applied on the basis of direct labor hours. The rates above were computed using 8,000 direct labor hours. No significant non-unit-level overhead costs are incurred. A local dental laboratory has offered to supply Apollonia all the crowns it needs. Its price is $265 for all-porcelain crowns and $145 for porcelain-fused-to-metal crowns; however, the offer is conditional on supplying both types of crowns it will not supply just one type for the price indicated. If the offer is accepted, the equipment used by Apollonia's laboratory would be scrapped (it is old and has no market value), and the lab facility would be closed. Apollonia uses 2,500 all-porcelain crowns and 1,000 porcelain-fused-to-metal crowns per year. Required: 1. Should Apollonia continue to make its own crowns, or should they be purchased from the extemal supplier? What is the dollar effect of purchasing? 2. What qualitative factors should Apollonia consider in making this decision? 3. Suppose that the lab facility is owned rather than rented and that the $22,000 is depreciation rather than rent. What effect does this have on the analysis in Requirement 1? Refer to the original data. Assume that the volume of crowns is 5,000 all porcelain and 2,000 porcelain fused to metal. Should Apollonia make or buy the crowns? Explain the out- come.

Please help me to do this problem 17.28

Answer 1

1) Make $ Particulars Direct Material (2500 x 190 ) +(1000 x 80) Direct labour (2500 x 50) +(1000 x 20) variable overhead (2500 x 25 )+(1000 x 5) Fixed overheads (30000 + 22000) purchase cost (2500 x 265)+(1000 x 145) total net saving (819500 - 807500) Buy $ 555000 145000 67500 52000 0 0 0 0 807500 807500 819500 12000

Apollonia should purchase it from external suppliers.

Dollar effect on purchasing is that there is a net saving of $12000

2)

The reliability of the producer, reduction of the work force, quality of the crowns, etc. these are the qualities which the Apollonia should consider while making the decision.

3)

3) Make $ 0 Particulars Direct Material (2500 x 190 ) +(1000 x 80) Direct labour (2500 x 50) +(1000 x 20) variable overhead (2500 x 25 )+(1000 x 5) Fixed overhead purchase cost (2500 x 265)+(1000 x 145) total net loss (797500 - 807500) Buy $ 555000 145000 67500 30000 0 0 0 807500 807500 797500 -10000

4)

4) Make $ 0 Particulars direct material (5000 x 190)+(2000 x 80) direct labour (5000 x 50)+(2000 x 20) Variable overhead (5000 x 25)+(2000 x 5) fixed overhead (30000 +22000) purchase cost (5000 x 265) + (2000 x 145) Total net loss (1587000 -1615000) Buy $ 1110000 290000 135000 52000 0 0 0 1615000 1615000 1587000 -28000

Since fixed cost is spread over more units hence Apollonia should make the crown.