Outsourcing variable costs direct material 006 006

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Outsourcing Variable costs: Direct material 0.06 $ 0.06 $ Direct labor 0.04 0.04 Variable overhead 0.04 0.04 Fixed costs: Supervisory salaries 0.04 0.01 Equipment depreciation 0.07 - Total cost per dessert 0.25 $ 0.15 $ Not all of the allocated fixed costs will be saved if Worldwide purchases from the outside bakery.
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Make-or-Buy Decisions If Worldwide purchases the dessert for 21¢, it will only save 15¢ so Worldwide will have a loss of 6¢ per dessert purchased. Wow, that’s no deal!
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Make-or-Buy Decisions Example The estimated costs of producing 6,000 units of a component are: Per Unit Total Direct Material $10 $60,000 Direct Labor 8 48,000 Applied Variable Factory Overhead 9 54,000 Applied Fixed Factory Overhead 12 72,000 $1.5 per direct labor dollar $39 $234,000
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Make-or-Buy Decisions Example The same component can be purchased from market at a price of $29 per unit. If the component is purchased from market, 25% of the fixed factory overhead will be saved. Should the component be purchased from the market? Per Unit Total Make Buy Make Buy Purchase Price $29 $174,000 Direct Material $10 $60,000 Direct Labor 8 48,000 Variable Overhead 9 54,000 Relevant Fixed Overhead 3 18,000 Total Relevant Costs $30 $29 $180,000 $174,000 Difference in Favor of Buying $1 $6,000
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Make-or-Buy Decisions Nantucket Nectars Company’s Cost of Making 12 -ounce Bottles Direct material $ 60,000 $.06 Direct labor 20,000 .02 Variable factory overhead 40,000 .04 Fixed factory overhead 80,000 .08 Total costs $200,000 $.20 Another manufacturer offers to sell Nantucket Nectars the bottles for $.18. Should Nantucket Nectars make or buy the bottles?
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Make-or-Buy Decisions Perhaps Nantucket Nectars will eliminate $50,000 of fixed costs if the company buys the bottles instead of making them. For example, the company may be able to release a supervisor with a $50,000 salary. If the company buys the bottles, $50,000 of fixed overhead would be eliminated. Should Nantucket make or buy the bottles?
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Make-or-Buy Decisions Purchase cost $180,000 $.18 Direct material $60,000 $.06 Direct labor 20,000 .02 Variable overhead 40,000 .04 Fixed OH avoided by not making 50,000 .05 0 0 Total relevant costs $170,000 $.17 $180,000 $.18 Difference in favor of making $ 10,000 $.01 Total Per Bottle Total Per Bottle Make Buy *Note that unavoidable fixed costs of $80,000 $50,000 = $30,000 are irrelevant. Thus, the irrelevant costs per unit are $.08 $.05 = $.03.
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Make or Buy and the Use of Facilities The value received from the best of alternative uses is an opportunity cost for the internal production of the parts or components Assume Nantucket Nectars facilities would remain idle, if the company chose to buy the bottles. The opportunity cost of the facilities is zero
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Make or Buy and the Use of Facilities Suppose Nantucket can use the released facilities in other manufacturing activities to produce a contribution to profits of $55,000, or can rent them out for $25,000. What are the alternatives?
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Make or Buy and the Use of Facilities Rent revenue $ $ $ 25 $ Contribution from other products 55 Variable cost of bottles (170) (180) (180) ( 180) Net relevant costs $(170) $(180) $(155) $(125) Make Buy and leave facilities idle Buy and rent out facilities Buy and use facilities for other products (amounts in $000)
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Make or Buy and the Use of Facilities Buying the bottles and using the vacated facilities for
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  • Fall '19
  • Limited Resources, Nantucket Nectars, Misspecified Costs

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