These5000unitsdonotdisplaceanyregularsales 4a

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Unformatted text preview: s at which the costs of make and buy are equivalent is All data analys is: Relevant data analys is: $390,000 + $3X X $240,000 + $3X X = $200,000 + $4X = 190,000 = $50,000 + $4X = 190,000 If production is expected to be less than 190,000, it is preferable to buy units fro m Tidnish. I f production is expected to exceed 190,000, it is preferable to manufacture the units internally. 11­27 11­36 (30 min.) Make versus buy, activity­based costing, opportunity costs. 1. Relevant costs under buy alternat ive: Purchases, 10,000 ´ $8.20 Relevant costs under make alternat ive: Direct materials Direct manufacturing labor Variable manufacturing overhead Inspect ion, setup, materials handling Machine rent Total relevant costs under make alternat ive $82,000 $40,000 20,000 15,000 2,000 3,000 $80,000 The allocated fixed plant administration, taxes, and insurance will not change if Ace makes or buys the chains. Hence, these costs are irrelevant to the make­or­buy decisio n. The analys is indicates that Ace should make and not buy the chains from the outside supplier. 2. Relevant costs under the make alternat ive: Relevant costs (as computed in requirement 1) Relevant costs under the buy alternat ive: Costs of purchases (10,000 ´ $8.20) Addit io nal fixed costs Addit io nal contribut ion margin from using the space where the chains were made to upgrade the bicyc les by adding mud flaps and reflector bars, 10,000 ´ ($20 – $18) Total relevant costs under the buy alternat ive $80,000 $82,000 16,000 (20,000) $78,000 Ace should now buy the chains fro m an outside vendor and use its own capacit y to upgrade its own bicycles. 3. In this requirement, the decisio n on mud flaps and reflectors is irrelevant to the analys is. Cost of manufacturing chains: Variable costs, ($4 + $2 + $1.50 = $7.50) ´ 6,200 a Batch costs, $200/batch ´ 8 batches Machine rent $46,500 1,600 3,000 $51,100 $50,840 Cost of buying chains, $8.20 ´ 6,200 a $2,000 ¸ 10 batches In this case, Ace should buy the chains fro...
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