Required:: Cost To Buy The Part: (1,000 X $1,250) Relevant Costs To Make

Southwestern Company needs 1,000 motors in its manufacture of automobiles.
It can buy the

motors from Jinx Motors for $1,250 each. Southwestern’s plant can manufacture the
motors for the following costs per unit:
Direct materials $ 500

Direct manufacturing labor 250
Variable manufacturing overhead 200
Fixed manufacturing overhead 350
Total $1,300
If Southwestern buys the motors from Jinx, 70% of the fixed manufacturing overhead
applied will not be avoided.
Required:
a. Should the company make or buy the motors?

b. What additional factors should Southwestern consider in deciding whether or
not to make or buy the motors?
Answer:
a. Cost to buy the part: (1,000 x $1,250) $1,250,000

Relevant costs to make:
Variable costs:
Direct materials (1,000 x $500) $500,000
Direct manufacturing. labor (1,000 x $250) 250,000
Variable manufacturing overhead (1,000 x $200) 200,000
Total $950,000
Avoidable fixed costs: ($350 x 1,000 x 0.30) 105,000 1,055,000
Savings if part is manufactured $ 195,000
b. Management should consider several qualitative factors in deciding whether to

make or buy the motors.
 Quality controls The company's ability to manufacture quality motors

versus that of the supplier.
 Delivery Can they make them when needed versus Jinx
delivering them when needed?
 Reputation What is the overall reputation of Jinx?
 Term Is Jinx willing to make long-term commitments for
delivery of the motors?
 Facilities What are the opportunity costs of using the space and
equipment to manufacture other items?
Difficulty: 2 Objective: 4
159. Kirkland Company manufactures a part for use in its production of hats. When
10,000 items are produced, the costs per unit are:
Direct materials $0.60

Direct manufacturing labor 3.00
Variable manufacturing overhead 1.20
Fixed manufacturing overhead 1.60
Total $6.40
Mike Company has offered to sell to Kirkland Company 10,000 units of the part for
$6.00 per unit. The plant facilities could be used to manufacture another item at a
savings of $9,000 if Kirkland accepts the offer. In addition, $1.00 per unit of fixed
manufacturing overhead on the original item would be eliminated.
Required:
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Kirkland Company? By how much?
Answer:
a. Direct materials $0.60

Direct manufacturing labor 3.00
Variable manufacturing overhead 1.20
Avoidable fixed manufacturing. overhead 1.00
Total relevant per unit costs $5.80
b. Make Buy Effect of Buying

Purchase price $60,000 $(60,000)
Savings in space (9,000) 9,000
Direct materials $6,000 6,000
Direct mfg. labor 30,000 30,000
Variable overhead 12,000 12,000
Fixed overhead saved (10,000) 10,000
Totals $48,000 $41,000 $7,000
The best alternative is to buy the part.
Difficulty: 2 Objectives: 4, 5, 6
160. Lewis Auto Company manufactures a part for use in its production of automobiles.
When 10,000 items are produced, the costs per unit are:
Direct materials $ 12
Fixed manufacturing overhead 32
Total $128
Monty Company has offered to sell Lewis Auto Company 10,000 units of the part for
$120 per unit. The plant facilities could be used to manufacture another part at a
savings of $180,000 if Lewis Auto accepts the supplier’s offer. In addition, $20 per
unit of fixed manufacturing overhead on the original part would be eliminated.
Required:
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Lewis Auto Company? By how much?
Answer:
a. Direct materials $12

Avoidable fixed manufacturing overhead 20
Total relevant per unit costs $116
b. Make Buy Effect of Buying

Purchase price $1,200,000 $(1,200,000)
Savings in space (180,000) 180,000
Direct materials $120,000 120,000
Direct manufacturing labor 600,000 600,000
Variable overhead 240,000 240,000
Fixed overhead saved (200,000) 200,000
Totals $960,000 $820,000 $140,000
The best alternative is to buy the part.
Hackerott Camera is considering eliminating Model AE1 from its camera line because of
losses over the past quarter. The past three months of information for model AE1 is
summarized below.
Sales (1,000 units) $250,000

Manufacturing costs:
Direct materials 140,000
Direct labor ($15 per hour) 30,000
Support 100,000
Operating loss ($20,000)
Support costs are 70% variable and the remaining 30% is depreciation of special
equipment for model AE1 that has no resale value.
Should Hackerott Camera eliminate Model AE1 from its product line? Why or why
not?
Answer:
No, Hackerott Camera should not eliminate Model AE1 from its product line because it
contributes $10,000 toward fixed costs and profits.
Sales (1,000 units) $250,000

Manufacturing costs:
Direct materials 140,000
Direct labor 30,000
Variable support ($100,000 x 70%) 70,000
Contribution margin $10,000
Difficulty: 2 Objective: 7
163. The management accountant for the Chocolate S’more Company has prepared the
following income statement for the most current year.
Chocolate Other Candy Fudge Total

Sales $40,000 $25,000 $35,000 $100,000
Cost of goods sold 26,000 15,000 19,000 60,000
Contribution margin 14,000 10,000 16,000 40,000
Delivery and ordering costs 2,000 3,000 2,000 7,000
Rent (per sq. foot used) 3,000 3,000 2,000 8,000
Allocated corporate costs 5,000 5,000 5,000 15,000
Corporate profit $4,000 $(1,000) $7,000 $10,000
a. Do you recommend discontinuing the Other Candy product line? Why or why
not?
b. If the Chocolate product line had been discontinued, corporate profits for the
current year would have decreased by what amount?
Answer:
a. No, I would not recommend discontinuing the Other Candy product line because
this product line contributes $4,000 towards corporate costs and profits.
$25,000 - $15,000 - $3,000 - $3,000 = $4,000
Without the Other Candy product line, corporate profits would be $4,000 less than
currently reported.
b. If the Chocolate product line were discontinued, corporate profits would

immediately decrease by $9,000.
$40,000 - $26,000 - $2,000 - $3,000 = $9,000

Required:: Cost To Buy The Part: (1,000 X $1,250) Relevant Costs To Make

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Required:: Cost To Buy The Part: (1,000 X $1,250) Relevant Costs To Make

Uploaded by

Copyright:

Available Formats

Southwestern Company needs 1,000 motors in its manufacture of automobiles.

It can buy the

Direct materials $ 500

a. Should the company make or buy the motors?

a. Cost to buy the part: (1,000 x $1,250) $1,250,000

b. Management should consider several qualitative factors in deciding whether to

 Quality controls The company's ability to manufacture quality motors

Direct materials $0.60

a. Direct materials $0.60

b. Make Buy Effect of Buying

The best alternative is to buy the part.

a. Direct materials $12

b. Make Buy Effect of Buying

The best alternative is to buy the part.

Sales (1,000 units) $250,000

Sales (1,000 units) $250,000

Chocolate Other Candy Fudge Total

b. If the Chocolate product line were discontinued, corporate profits would

You might also like