Question

Baird Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Baird produces a relatively small amount (17,000 units) of the cream and is considering the purchase of the product from an outside supplier for $4.70 each. If Baird purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Baird’s accountant constructed the following profitability analysis:

1. Identify the cost items relevant to the make-or-outsource decision.

2. What is the avoidable cost per unit if the outsourcing decision is taken? Should Baird continue to make the product or buy it from the supplier?

3. Suppose that Baird is able to increase sales by 10,000 units (sales will increase to 27,000 units). Calculate the total avoidable costs. At this level of production, should Baird make or buy the cream?

Revenue (17,000 units x $11.00) Unit-level materials costs (17,000 units x $1.60) Unit-level labor costs (17,000 unitss x $0.70) Unit-level overhead costs (17,000 x Unit-level selling expenses (17,000 Contribution margin Skin cream production supervisor's salary Allocated portion of facility-level costs Product-level advertising cost $187,000 (27,200) (11,900) (5,100) (6,800) $0.30) x $0.40) 136,000 (48,000) (11,800) (39,000) Contribution to companywide income 37,200 Complete this question by entering your answers in the tabs below. Required C Required A Required B Identify the cost items relevant to the make-or-outsource decision Total avoidable costs Required A Required B Complete this question by entering your answers in the tabs below. Required B Required A Required C What is the avoidable cost per unit if the outsourcing decision is taken? Should Baird continue to make the product or buy it from the supplier? (Round your answer to 2 decimal places.) Total avoidable costs per unit Should Baird continue to make the product or buy it from the supplier? Required A Required C Complete this question by entering your answers in the tabs below. Required A Required B Required C Suppose that Baird is able to increase sales by 10,000 units (sales will increase to 27,000 units). Calculate the total avoidable Ecosts. At this level of production, should Baird make or buy the cream? Total avoidable costs At this level of production, should Baird make or buy the cream? Required B Required C

Answer 1

Requirement A Unit level Material costs 27,200 Unit level Labor costs 11,900 Unit level Overhead costs 5,100 Skin cream production Supervisor's Salary $ $ 48,000 Total Avoidable costs 92,200 Requirement B Avoidable cost per unit (92200/17000) $ 5.42 per unit Should Baird continue to make the product or buy it from the supplier Buy (since supplier price ($ 4.70) is less than avoidable costs p.u Requirement C If sales is increased by 10000 units Then, Avoidable costs are $ Material (27000*1.60) 43,200 $ Labor (27000*0.70) 18,900 OH (27000*0.30) $ 8,100 $ Skin cream production supervisor's salary 48,000 $1,18,200 Total Avoidable costs 1,26,900 Costs of buying from supplier (27000*4.7) Since, avoidable cost is less than cost of buying at 27000 units of production, Baird should make the cream.