Relevant costs Ch 23

Relevant costs Ch 23 - than the total cost to produce the...

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EXAMPLE OF ACCEPTING ADDITIONAL BUSINESS Current Business Additional Business Combined Business Units Dollars Units Dollars Units Dollars 100,000 Units 10,000 Units 110,000 Units Sales $10.00 1,000,000 $8.50 85,000 $9.86 1,085,000 Expenses: Direct materials 3.50 350,000 3.50 35,000 3.50 385,000 Direct labor 2.20 220,000 2.20 22,000 2.20 242,000 Factory overhead 1.10 110,000 0.50 5,000 1.05 115,000 Selling expenses 1.40 140,000 0.20 2,000 1.29 142,000 Administrative expenses 0.80 80,000 0.10 1,000 0.74 81,000 Total expenses $9.00 900,000 $6.50 65,000 $8.77 965,000 Operating income $1.00 100,000 $2.00 20,000 $1.09 120,000 Company currently sells 100,000 units at the selling price and costs per unit above. Company has opportunity to sell additional 10,000 units but at $8.50 per unit which is $0.50 less than the total expenses to produce the units. Overhead would increase by $5,000, selling expenses would increase by $2,000 and total admin expenses would increase by $1,000. Company would accept the order despite the fact that the selling price is $0.50 less
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Unformatted text preview: than the total cost to produce the units at the existing level of operations. EXAMPLE OF MAKE OR BUY DECISION Cost to make Part #417 as opposed to simply going outside and purchasing the part from vendors. UNIT COST UNIT COST Breakeven TO MAKE to BUY Make or Buy Direct materials per unit $0.45 $0.45 Direct labor per unit $0.50 $0.50 Factory overhead per unit $0.50 0.25 1.20 Cost to make $1.45 $1.20 $1.20 ALTHOUGH IT APPEARS TO BE CHEAPER TO JUST BUY THE PART FROM A VENDOR, THE COMPANY MUST ACCOUNT FOR THE $0.50 OF OVERHEAD PER UNIT THAT WILL STILL BE INCURRED REGARDLESS OF WHETHER YOU MAKE OR BUY. THEREFORE, COMPANY MUST ELIMINATE AT LEAST $0.25 OF OVERHEAD PER UNIT BEFORE IT BECOMES BREAKEVEN WHETHER TO MAKE OR BUY. IF THE COMPANY CANNOT FIND A WAY TO ELIMINATE THE OVERHEAD FOR AT LEAST $0.25 PER UNIT THEN YOU WOULD CHOSE TO MAKE THE PRODUCT RATHER THAN BUY....
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