If the product is not avoidable irrelevant if the

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Unformatted text preview: duct is dropped, it will be reallocated to other products. dropped, it will be reallocated to other products. 10-40 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 Should we make or buy part 4A? Given that the total avoidable costs are less than the cost of buying the part, Essex should continue to make the part. 10-41 Opportunity Cost An opportunity cost is the benefit that is foregone as a result of pursuing some course of action. Opportunity costs are not actual cash outlays and are not recorded in the formal accounts of an organization. How would this concept potentially relate to the Essex Company? 10-42 Learning Objective 4 Prepare an analysis showing whether a special order should be accepted. 10-43 Key Terms and Concepts A special order is a one-time order that is not considered part of the company’s normal ongoing business. When analyzing a special order, only the incremental costs and benefits are relevant. Since the existing fixed manufacturing overhead costs would not be affected by the order, they are not relevant. 10-44 Special Orders Jet, Inc., makes a single product whose normal selling price is $20 per unit. A foreign distributor offers to purchase 3,000 units for $10 per unit. This is a one-time order that would not affect the company’s regular business. Annual capacity is 10,000 units, but Jet, Inc., is currently producing and selling only 5,000 units. Should Jet accept the offer? 10-45 Special Orders $8 variable cost $8 variable cost 10-46 Special Orders If Jet accepts the special order, the incremental revenue will exceed the incremental costs. In other words, net operating income will increase by $6,000. This suggests that Jet should accept the order. Increase in revenue (3,000 × $10) I ncrease in costs (3,000 × $8 variable cost) I ncrease in net income $ 30,000 24,000 $ 6,000 Note: This answer assumes that the fixed costs are unavoidable and that variable marketing costs must be incurred on the special order. 10-47 Quick Check Northern Optical ordinarily sells the X-lens for $50. The variable production cost is $10, the fixed production cost is $18 per unit, and the variable selling cost is $1. A customer has requested a special order for 10,000 units of the X-lens to be imprinted with the customer’s logo. This special order would not involve any selling costs, but Northern Optical would have to purchase an imprinting machine for $50,000. (see the next page) 10-48 Quick Check What is the rock bottom minimum price below which Northern Optical should not go in its negotiations with the customer? In other words, below what price would Northern Optical actually be losing money on the sale? There is ample idle capacity to fulfill the order and the imprinting machi...
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