Question

 

Cruise Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 6,000 units, are as follows:

Direct materials	$4.00
Direct labour	$4.00
Variable manufacturing overhead	$3.00
Fixed manufacturing overhead	$4.00
Total cost	$15.00
The fixed overhead costs are unavoidable.

1. Assuming Cruise Company can purchase 6,000 units of the part from Suri Company for $13 each, and the facilities currently used to make the part could be rented out to another manufacturer for $24,000 a year, what should Cruise Company do?

1. Make the part and save $6.00 per unit.

2. Make the part and save $2.00 per unit.

3. Buy the part and save $2.00 per unit.

4. Buy the part and save $4.00 per unit.

 

2. Assume Cruise Company can purchase 6,000 units of the part from Suri Company for $13.00 each, and the facilities currently used to make the part could be used to manufacture 6,000 units of another product that would have an $7 per unit contribution margin. If no additional fixed costs would be incurred, what should Cruise Company do?

1. Make the new product and buy the part to earn an extra $5.00 per unit contribution to profit.

2. Make the new product and buy the part to earn an extra $6.00 per unit contribution to profit.

3. Continue to make the part to earn an extra $2.00 per unit contribution to profit.

4. Continue to make the part to earn an extra $5.00 per unit contribution to profit.

 

 

Answer 1

fixed Overhead is not avoidable so they are not relevant as they will remain same even if product is made or bought from outside.

we will prepare incremental analysis between two alternatives

	Make	Buy	Increase (decrease) in net income
Direct material	$4	0	$4
Labor	$4	0	$4
Variable OH	$3	0	$3
Cost of buying	0	$13	($13)
Opportunity cost	$4[$24,000/6,000]	0	$4	If the product is made $4 would be an opportunity cost that would be lost if product is made instead of buying.
Total cost	$15	$13	$2 [15-3]

cost saved if bought from suri company $2 per unit

=$2 per unit saved if bought

Buy the part and save $2.00 per unit.

Answer C

2)

	Make	Buy	Increase (decrease) in net income
Direct material	$4	0	$4
Labor	$4	0	$4
Variable OH	$3	0	$3
Cost of buying	0	$13	($13)
Opportunity cost	$7	0	$7	If the product is made $7 contribution margin would be an opportunity cost that would be lost if product is made instead of buying.
Total cost	$18	$13	$5[$18-13]

Make the new product and buy the part to earn an extra $5.00 per unit contribution to profit.

Answer A)p-