Question

E11-25 (similar to) The Sunbeam 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: (Click the icon to view the costs.) 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 labor Variable batch manufacturing costs Fixed manufacturing costs Avoidable fixed manufacturing costs Unavoidable fixed manufacturing costs Total manufacturing costs

Answer 1

Sunbeam Corporation 1.The expected manufacturing cost per unit of CMCBs in 2018 is as follows: Total Manufacturing Manufacturing Costs of CMCB Cost per Unit 1 (2) = (1) = 4,000 Direct materials, $165 x 4,000 660000 165 Direct manufacturing labor, $39 x 4,000 156000 39 Variable batch manufacturing costs, $2,000 x 40 80000 20 Fixed manufacturing costs Avoidable fixed manufacturing costs 140000 35 Unavoidable fixed manufacturing costs 360000 90 Total manufacturing costs 1396000 349 2.The following table identifies the incremental costs in 2018 if Sunbeam (a) made CMCBs and (b) purchased CMCBs from Michigan. Total Per-Unit Incremental Costs Incremental Costs Incremental Items Make Buy Make Buy Cost of purchasing CMCBs from Michigan 1560000 390 Direct materials 660000 165 Direct manufacturing labor 156000 39 Variable batch manufacturing costs 80000 20 Avoidable fixed manufacturing costs 140000 35 Total incremental costs 1036000 1560000 259 390 Difference in favor of making 524000 131 390 x 4000 = 1560000 Note that the opportunity cost of using capacity to make CMCBs is zero because Sunbeam would keep this capacity idle if it purchases CMCBs from Michigan. Sunbeam should continue to manufacture the CMCBs internally because the incremental costs to manufacture are $259 per unit compared to the $300 per unit that Michigan has quoted Note that the unavoidable fixed manufacturing costs of $360,000 ($90 per unit) will continue to be incurred whether Sunbeam makes or buys CMCBs. These are not incremental costs under either the make or the buy alternative and, hence, are irrelevant. 3.Sunbeam should continue to make CMCBs. The simplest way to analyze this problem is to recognize that Sunbeam would prefer to keep any excess capacity idle rather than use it to make CB3s. Why? Because expected incremental future revenues from CB3s, $2,300,000, are less than expected incremental future costs, $2,420,000. If Sunbeam keeps its capacity idle, we know from requirement 2 that it should make CMCBs rather than buy them. An important point to note is that, because Sunbeam forgoes no contribution by not being able to make and sell CB3s, the opportunity cost of using its facilities to make CMCBs is zero. It is, therefore, not forgoing any profits by using the capacity to manufacture CMCBs. If it does not manufacture CMCBs, rather than lose money on CB3s, Sunbeam will keep capacity idle. Choices for Sunbeam Make CMCBs Buy CMCBs and Do Not and Make Make CB3s CB3s, if Profitable Relevant Items Total incremental costs of making/buying CMCBs (from requirement 2) 1036000 1560000 Because incremental future costs exceed incremental future revenues from CB3s, Sunbeam will make zero CB3s even if it buys CMCBs from Michigan Total relevant costs 0 0 1036000 1560000 Sunbeam will minimize manufacturing costs and maximize operating income by making CMCBs OPPORTUNITY-COST APPROACH TO MAKE-OR-BUY DECISIONS 1036000 1560000 Total incremental costs of making/buying CMCBS (from requirement 2) Opportunity cost: profit contribution forgone because capacity will not be used to make CB3s Total relevant costs 0 1036000 1560000