Question

Please answer both question 1 & 2. I will rate, thank you.

Suppose an outside supplier will sell bindings to Outdoor Sports for $16 each. Ouldoor Sports will pay $1.00 per unit to to show Direct labor 82.000 S 10.00
Q1

Q2

Q2

Q2

Answer 1

Solution:

Problem 1 – Make or Buy decision

The relevant cost concept plays a very important role in make or buy decision. The cost which are relevant in making the production and buying the product from outside supplier is taken into consideration for decision making.

Relevant Cost is the future cost which will incur in future and different under each alternative course of action. The cost which satisfies above two conditions are treated as Relevant Cost.

Here in the question the relevant cost is variable cost which will incur in future if the product are produced and not incur if not produced (i.e. different under each alternative course of action).

Fixed Costs are taken as SUNK Cost since these are past cost and does not affect the decision whether to make or buy.

Total Variable Cost for making the product = Direct materials 24,000 + direct labor 82,000 + Variable MOH 48,000 = $154,000

The total cost if the product is purchased from outside supplier

	$$
Price offered by outside supplier (23,600*$16)	$377,600
Transportation Cost (23,600*$1)	$23,600
Logo Cost (23,600*$0.40)	$9,440
Total Cost of buying from outside supplier	$410,640

And the avoidable fixed cost $2,300.

Incremental Analysis
	Make	Buy (Outsource)	Difference
	Bindings	Bindings
Variable Cost	$154,000	$410,640	$256,640
Plus: Fixed Cost	$82,000	79700	($2,300)
Total cost of 23,600 bindings	$236,000	$490,340	$254,340

Outdoor sports should not buy the bindings from outside supplier.

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Porblem - 2 is already solved..