10 32 beware of allocated fixed costs including

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Unformatted text preview: uding unavoidable common fixed costs makes the product line appear to be unprofitable. Our allocations can make a segment look less profitable than it really is. 10-33 Learning Objective 3 Prepare a make or buy analysis. 10-34 The Make or Buy Analysis When a company is involved in more than one activity in the entire value chain, it is vertically integrated. A decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier is called a “make or buy” decision. 10-35 The Make or Buy Decision: An Example ssex Company manufactures part 4A that is used in one of its products. The unit product cost of this part is: Direct materials Direct labor Variable overhead Depreciation of special equip. Supervisor's salary General factory overhead Unit product cost $ 9 5 1 3 2 10 $ 30 10-36 The Make or Buy Decision • The special equipment used to manufacture part 4A has no resale value. • The total amount of general factory overhead, which is allocated on the basis of direct labor-hours, would be unaffected by this decision. • The $30 unit product cost is based on 20,000 parts produced each year. • An outside supplier has offered to provide the 20,000 parts at a cost of $25 per part. Should we accept the supplier’s offer? Should we accept the supplier’s offer? 10-37 The Make or Buy Decision Cost Per Unit Outside purchase price $ 25 Direct materials (20,000 units) Direct labor Variable overhead Depreciation of equip. Supervisor's salary General factory overhead Total cost $ 9 5 1 3 2 10 $ 30 Cost of 20,000 Units Buy Make $ 500,000 180,000 100,000 20,000 40,000 $ 340,000 $ 500,000 The avoidable costs associated with making part 4A include direct The avoidable costs associated with making part 4A include direct materials, direct labor, variable overhead, and the supervisor’s salary. materials, direct labor, variable overhead, and the supervisor’s salary. 10-38 The Make or Buy Decision Cost Per Unit Outside purchase price $ 25 Direct materials (20,000 units) Direct labor Variable overhead Depreciation of equip. Supervisor's salary General factory overhead Total cost $ 9 5 1 3 2 10 $ 30 Cost of 20,000 Units Buy Make $ 500,000 180,000 100,000 20,000 40,000 $ 340,000 $ 500,000 The depreciation of the special equipment represents a sunk The depreciation of the special equipment represents a sunk cost.. The equipment has no resale value, thus its cost and cost The equipment has no resale value, thus its cost and associated depreciation are irrelevant to the decision. associated depreciation are irrelevant to the decision. 10-39 The Make or Buy Decision Cost Per Unit Outside purchase price $ 25 Direct materials (20,000 units) Direct labor Variable overhead Depreciation of equip. Supervisor's salary General factory overhead Total cost $ 9 5 1 3 2 10 $ 30 Cost of 20,000 Units Buy Make $ 500,000 180,000 100,000 20,000 40,000 $ 340,000 $ 500,000 Not avoidable; irrelevant. If the product is Not avoidable; irrelevant. If the pro...
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This document was uploaded on 03/23/2014.

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