True Corporation’s Domestic Division produces wedge cutting machines, which use a component called stuff. They are considering an offer to outsource the production of stuff to jason Company who has offered to produce 50,000 stuff at a total price of $100,000. The following costs are associated with this part of the process when 50,000 stuff are produced:
Direct material $44,000
Direct labor $20,000
Manufacturing OH $60,000
TOTAL 124,000
Included in the manufacturing overhead is the $50,000 salary of a worker, who will be fired if the components are no longer produced by True corp. Since the worker also spends part of his time on other supervisory duties, a part-time person must be hired to handle these functions, at an estimated cost of $18,000. The remaining manufacturing overhead will continue whether or not True corp. makes the units or outsources the components to jason.
Regarding the outsourcing decision, is it a good idea? Should True corp. make or buy these units AND what is the amount of benefit, in dollars, to making this decision?
_____________________ better by $________________
Make or buy
Per unit
Selling price $35
Variable costs:
Direct materials $10
Direct labor $5
Variable OH $3
Variable selling $2
Fixed Costs:
Fixed OH
CANT SEE REST OF INFORMATION
NOW ASSUME that thee Domestic Division of True Corp is producing the maximum amount of Product X that it can produce, given current manufacturing constraints.
True’s international Division is currently purchasing a product very similar to Product X to the open market for a price $30 per unit. They seek a better price from their domestic division. If the Domestic Division sells to the international Division, variable selling costs will be reduced by 75%.
Considering the objectives of the domestic and international division individually what is the range within which an appropriate transfer price would be negotiated?
Minimum_____________________ Maximum_______________
Purchase price paid to outsider | $100,000 | ||
Part time employee | 18000 | ||
Total cost to buy | $118,000 | ||
Relevant cost to make | |||
Direct material | $44,000 | ||
Direct labor | 20000 | ||
MOH | 50000 | ||
Relevant cost to make | $114,000 | ||
No it sis not a good idea to outsource, | |||
True corp should make the product | |||
True company will make and be better by $4000 (118000-114000) | |||
ans 2 | |||
Minimum | $30 | ||
Maximum price is | $33.5 | ||
Minimum price for domestic division is | |||
Variable cost required to produce it+contribution margin | |||
(10+5+3+(2*.25))+(35-10-5-3-2) | 33.5 | ||
If any doubt please comment |
True Corporation’s Domestic Division produces wedge cutting machines, which use a component called stuff. They are...
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