Question

Vernon Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Vernon produces a relatively small amount (18,000 units) of the cream and is considering the purchase of the product from an outside supplier for $5.90 each. If Vernon purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Vernon's accountant constructed the following profitability analysis: Revenue (18,000 units x $15.00) Unit-level materials costs (18,800 units x $1.90) Unit-level labor costs (18,000 units x $0.50) Unit-level overhead costs (18,080 x $0.40) Unit-level selling expenses (18,080 x $0.20) Contribution margin Skin cream production supervisor's salary Allocated portion of facility-level costs Product-level advertising cost Contribution to company-wide income $270,000 (34,200) (9,000) (7,200) (3,600) 216,000 (66,000) (13,100) (48,000) $ 88,900 Required a. Identify the cost items relevant to the make-or-outsource decision. b. What is the avoidable cost per unit if the outsourcing decision is taken? Should Vernon continue to make the product or buy it from the supplier? c. Suppose that Vernon is able to increase sales by 11,000 units (sales will increase to 29,000 units). Calculate the total avoidable costs. At this level of production, should Vernon make or buy the cream? Complete this question by entering your answers in the tabs below. Required A Required B Required Identify the cost items relevant to the make-or-outsource decision. Total avoidable costs Required A Required B Required C What is the avoidable cost per unit if the outsourcing decision is taken? Should Vernon continue to make the product or buy it from the supplier? (Round your answer to 2 decimal places.) per unit Total avoidable costs Should Vernon continue to make the product or buy it from the supplier? < Required A Required C > Required A Required B Required C Suppose that Vernon is able to increase sales by 11,000 units (sales will increase to 29,000 units). Calculate the total avoidable costs. At this level of production, should Vernon make or buy the cream? Total avoidable costs At this level of production, should Vernon make or buy the cream? < Required B Required )

Answer 1

Solution- @ Themy relavent to the make or) out socorct decisions 1 unit level material cost (ii) unit. level labocor cost ! (ing unit lever overhead cost Livs sleih cream production supervisoi's salary Above costs are avoidable.costs. Based on these costs company take outsource decision Avoidable cost per unit:- unit level material cost = $$ 34,200 unut levetop labour cost = $9000 init level overhead cost = $7200 skin cream production Supervisor's = $ 66,000 . Salary Toto avoidable costs = $116,400 Number of units = 18000 - Avoidable cost periunit = $116,400 118000 = $ 6. 47. * Avoidable cost per unit is $6.47 which is higher compared to prices offered by Supplier (ie $5-90), vernon should be the product from outside supplier

CGI Avoidalde cost porunit at 29000 units unit level material cost (29000 x 1.90) = $55100 unit level labow.cost(29000x $0.50) = $14500 uht level overhead COSE (29000x$0.40) = $11600 skin cream production suporvisor sulary = $66000 = $147,200 Totoy avoidable cost No. of units = 29000 :: Avoidable.cost per urut = $1477200 29000 = $5.08 .: Avoidable cost per unit is lower than bluging cost perunit, * Vernon should make the cream EX=