Week_1_Chat_Solutions

Week_1_Chat_Solutions - Week 1 Chat Solutions 11-20 (30...

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Unformatted text preview: Week 1 Chat Solutions 11-20 (30 min.) Make versus buy, activity-based costing. 1. The expected manufacturing cost per unit of CMCBs in 2012 is as follows: Total Manufacturi ng Costs of CMCB (1) Manufacturin g Cost per Unit (2) = (1) 10,000 Direct materials, $170 10,000 Direct manufacturing labor, $45 10,000 Variable batch manufacturing costs, $1,500 80 Fixed manufacturing costs Avoidable fixed manufacturing costs Unavoidable fixed manufacturing costs Total manufacturing costs $1,700,000 450,000 120,000 320,000 800,000 $3,390,000 $170 45 12 32 80 $339 2. The following table identifies the incremental costs in 2012 if Svenson (a) made CMCBs and (b) purchased CMCBs from Minton. Total Incremental Costs Per-Unit Incremental Costs Incremental Items Make Buy Make Buy Cost of purchasing CMCBs from Minton Direct materials Direct manufacturing labor Variable batch manufacturing costs Avoidable fixed manufacturing costs Total incremental costs $1,700,0 00 450,000 120,000 320,0 00 $2,590,0 00 $3,000,0 00 $3,000,0 00 $170 45 12 32 $259 $300 $300 Difference in favor of making $ 410,000 $41 Note that the opportunity cost of using capacity to make CMCBs is zero since Svenson would keep this capacity idle if it purchases CMCBs from Minton. Svenson should continue to manufacture the CMCBs internally since the incremental costs to manufacture are $259 per unit compared to the $300 per unit that Minton has quoted. Note that the unavoidable fixed manufacturing costs of $800,000 ($80 per unit) will continue to be incurred whether Svenson makes or buys CMCBs. These are not incremental costs under either the make or the buy alternative and hence, are irrelevant. 3. Svenson should continue to make CMCBs. The simplest way to analyze this problem is to recognize that Svenson would prefer to keep any excess capacity idle rather than use it to make CB3s. Why? Because expected incremental future revenues from CB3s, $2,000,000, are less than expected incremental future costs, $2,150,000. If Svenson keeps its capacity idle, we know from requirement 2 that it should make CMCBs rather than buy them. An important point to note is that, because Svenson forgoes no contribution by not being able to make and sell CB3s, the opportunity cost of using its facilities to make CMCBs is zero. It is, therefore, not forgoing any profits by using the capacity to manufacture CMCBs. If it does not manufacture CMCBs, rather than lose money on CB3s, Svenson will keep capacity idle. A longer and more detailed approach is to use the total alternatives or...
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This note was uploaded on 05/12/2011 for the course ACCT 433b taught by Professor Alfredcontreras during the Spring '11 term at National.

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Week_1_Chat_Solutions - Week 1 Chat Solutions 11-20 (30...

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