Question

Stuart Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Stuart produces a relatively small amount (14,000 units) of the cream and is considering the purchase of the product from an outside supplier for $5.70 each. If Stuart purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Stuart's accountant constructed the following profitability analysis: Revenue (14,000 units $14.00) Unit-level materials costs (14,000 units X $1.70) Unit-level labor costs (14,000 units * $0.60) Unit-level overhead costs (14,000 * $0.40) Unit-level selling expenses (14,000 * $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 $196,000 (23,800) (8,400) (5,600) (2.800) 155,400 (57,000) (13,900) (46,000) $ 38,500 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 Stuart continue to make the product or buy it from the supplier? C. Suppose that Stuart is able to increase sales by 17,000 units (sales will increase to 31,000 units). Calculate the total avoidable costs, At this level of production, should Stuart make or buy the cream? Complete this question by entering your answers in the tabs below. Required A Required B Required C Identify the cost items relevant to the make-or-outsource decision. Total avoidable costs

Answer 1

A.

Unit level material cost	$23,800
Unit level labor cost	8,400
Unit level overhead cost	5,600
Unit level selling expenses	2,800
Skin cream production supervisor salary (Fixed cost)	57,000
Total avoidable cost	$97,600

B.

Avoidable cost per unit = $97,600 / 14,000 = $6.97 per unit

Stuart should buy the product from supplier as avoidable cost per unit is more than purchase cost per unit

C.

Unit level material cost (31,000*$1.70)	$52,700
Unit level labor cost (31,000*$0.60)	18,600
Unit level overhead cost (31,000*$0.40)	12,400
Unit level selling expenses (31,000*$0.20)	6,200
Skin cream production supervisor salary (Fixed cost)	57,000
Total avoidable cost	$146,900

Stuart should make the product as cost of purchase $176,700 (31,000*$5.70) is more than avoidable cost $146,900