Itistherefore not forgoing anypro fits byusing

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Unformatted text preview: ufacture are $259 per unit compared to the $300 per unit that Minton has quoted. Note that the unavo idable fixed manufacturing costs of $800,000 ($80 per unit) will cont inue to be incurred whether Svenson makes or buys CMCBs. These are not incremental costs under either the make or the buy alternat ive and hence, are irrelevant. 11­7 3. Svenson should cont inue to make CMCBs. The simplest way to analyze this problem is to recognize that Svenson would prefer to keep any excess capacit y idle rather than use it to make CB3s. Why? Because expected incremental future revenues fro m CB3s, $2,000,000, are less than expected incremental future costs, $2,150,000. If Svenson keeps its capacit y idle, we know fro m requirement 2 that it should make CMCBs rather than buy them. An important point to note is that, because Svenson forgoes no contribut ion by not being able to make and sell CB3s, the opportunit y cost of using its facilit ies to make CMCBs is zero. It is, therefore, not forgoing any pro fits by using the capacit y to manufacture CMCBs. If it does not manufacture CMCBs, rather than lose money on CB3s, Svenson will keep capacit y idle. A longer and more detailed approach is to use the total alternat ives or opportunit y cost analyses shown in Exhibit 11­7 of the chapter. Choices for Svenson Make CMCBs Buy CMCBs Buy CMCBs and Do Not and Do Not and Make Relevant Items Make CB3s Make CB3s CB3s TOTAL­ALTERNATIVES APPROACH TO MAKE­OR­BUY DECISIONS Total incremental costs of making/buying CMCBs (from requirement 2) Excess of future costs over future revenues from CB3s Total relevant costs $2,590,000 0 $2,590,000 $3,000,000 0 $3,000,000 $3,000,000 150,000 $3,150,000 Svenson will minimize manufacturing costs by making CMCBs. OPPORTUNITY­COST APPROACH TO MAKE­OR­BUY DECISIONS Total incremental costs of making/buying CMCBs (from requirement 2) $2,590,000 $3,000,000 Opportunity cost: profit contribut ion forgone because capacit y will not * * be used to make CB3s 0 0 Total relevant costs $2,590,000 $3,000,000 * $3,000,000 0 $3,000,000 Opportunity cost is 0 because Sve...
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