Question

In: Accounting

Mita Company currently manufactures a subassembly for its main product. The costs per unit are as...

Mita Company currently manufactures a subassembly for its main product. The costs per unit are as follows.

Direct Materials

$4.00

Direct Labour

$30.00

Variable overhead

$15.00

Fixed Overhead (allocated)

$25.00

Total

$74.00

Excel Co. has contacted Mita Company with an offer to sell it 5000 subassemblies for $55 each.

Required

  1. Why is it important to identify whether any of the fixed overhead is avoidable or unavoidable in order to assess the outsourcing of the subassembly? Explain.
  1. Should Mita Company make or buy the subassemblies? Create a schedule that shows the quantitative differences per unit and in total values between the two alternatives. Assume all fixed overhead is unavoidable.                    Explain and show your calculations
  1. What if $50 000 of fixed overhead would not be incurred if Mita Company outsources the assemblies, would it change your decision in (b) above? Explain and show your calculations.                      (8marks)

d. What qualitative factors should the accountants and managers of Mita Company consider in their ‘make or buy’ decision

Solutions

Expert Solution

Answer 1:

It is important because avoidable fixed costs are relevant costs in a decision making whereas unavoidable fixed costs are irrelevant to the decision making process.

Answer 2:

Buy the parts Make the parts Difference
Purchase Cost $               55 $          55
Direct material $                     4 $          (4)
Direct Labor $                   30 $        (30)
Variable Manufacturing overheads $                   15 $        (15)
Total $               55 $                   49 $            6

Mita should MAKE the parts.

Answer 3:

Buy the parts Make the parts Difference
Purchase Cost $               55 $          55
Direct material $                     4 $          (4)
Direct Labor $                   30 $        (30)
Variable Manufacturing overheads $                   15 $        (15)
Fixed Manufacturing overheads $                   10 $        (10)
Total $               55 $                   59 $          (4)

Mita shoul BUY the parts.

Answer 4:

Qualitative factors are:

  1. Mita should ensure that the units purchased from Excel Co are of good quality; and
  2. The delivery of units from Excel Co is on time.

In case of any doubt, please feel free to comment.


Related Solutions

Yoklic Ltd currently manufactures a subassembly for its main product. The costs per unit are as...
Yoklic Ltd currently manufactures a subassembly for its main product. The costs per unit are as follows: Direct materials $4 Direct labour $30 Variable overhead $15 Fixed overhead $25 Total $74 Regina Ltd has contacted Yoklic with an offer to sell it 5000 subassemblies for $55.00 each. Required (a)     Should Yoklic make or buy the subassemblies? Create a schedule that shows the total quantitative differences between the two alternatives. (b)     The accountant decided to investigate the fixed costs to see...
2. Yoklic Ltd currently manufactures a subassembly for its main product. The costs per unit are...
2. Yoklic Ltd currently manufactures a subassembly for its main product. The costs per unit are as follows: Direct materials $4 Direct labour $30 Variable overhead $15 Fixed overhead $25 Total $74 Regina Ltd has contacted Yoklic with an offer to sell it 5000 subassemblies for $55.00 each. Required (a)     Should Yoklic make or buy the subassemblies? Create a schedule that shows the total quantitative differences between the two alternatives. (b)     The accountant decided to investigate the fixed costs to...
Make or Buy Smith Corporation currently manufactures a subassembly for its main product. The costs per...
Make or Buy Smith Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows: Direct materials                            $ 1 Direct labor                                     10 Variable overhead                             5 Fixed overhead                                 8 Total                                              $24 Funkhouser Company has contacted Smith with an offer to sell it 5,000 of the subassemblies for $20 each. If Funkhouser makes the subassemblies, $5 of the fixed overhead per unit will be allocated to other products. Required: a.   Should Smith make or buy the...
Concord, Inc. currently manufactures a wicket as its main product. The costs per unit are as...
Concord, Inc. currently manufactures a wicket as its main product. The costs per unit are as follows: Direct materials and direct labor $12 Variable overhead 5 Fixed overhead 8 Total $25 Saran Company has contacted Concord with an offer to sell it 5700 of the wickets for $19 each. If Concord makes the wickets, variable costs are $17 per unit. Fixed costs are $8 per unit; however, $5 per unit is unavoidable. Should Concord make or buy the wickets? Buy;...
Bush Industries currently manufactures 56,000 units of a product with the following costs per unit Direct...
Bush Industries currently manufactures 56,000 units of a product with the following costs per unit Direct materials......................................... $6.00 Direct labor.............................................. $18.00 Variable manufacturing overhead............  $9.00 Fixed manufacturing overhead................$12.00 Variable selling..........................................$3.00 Fixed selling..............................................$4.00 The company has the capacity to produce 60,000 units. The product regularly sells for $60. A wholesaler has offered to pay $55 a unit for 5,000 units and will pick up the units, thereby saving Bush the variable selling costs. If the special order is accepted, what would be...
Company sells its product for $11700 per unit. Variable costs per unit are: manufacturing, $5500; and...
Company sells its product for $11700 per unit. Variable costs per unit are: manufacturing, $5500; and selling and administrative, $135. Fixed costs are: $30000 manufacturing overhead, and $40000 selling and administrative. There was no beginning inventory at 1/1/18. Production was 20 units per year in 2018–2020. Sales were 20 units in 2018, 16 units in 2019, and 24 units in 2020. Income under variable costing for 2019 is $27040. $33040. $35200. $60080.
Quiz Company sells its product for $10 per unit. Variable costs are $6 per unit and...
Quiz Company sells its product for $10 per unit. Variable costs are $6 per unit and fixed costs are $15,000 per week. During the third week of July, Quiz Company sold 5,000 units. 1. Determine the number of units Quiz Company must sell to earn operating income of $8,000. 2. Determine the sales revenue (in dollars) Quiz Company must generate to break even. 3. Determine the sales revenue (in dollars) Quiz Company must generate to earn operating income of $8,000....
Sara's company manufactures a product with the following costs: Per Unit Per Year Direct materials $...
Sara's company manufactures a product with the following costs: Per Unit Per Year Direct materials $ 25.30 Direct labor $ 14.30 Variable manufacturing overhead $ 2.50 Fixed manufacturing overhead $ 1,275,000 Variable selling and administrative expenses $ 2.40 Fixed selling and administrative expenses $ 1,249,500 The company uses the absorption costing approach to cost-plus pricing described in the text. The pricing calculations are based on budgeted production and sales of 85,000 units per year. The company has invested $260,000 in...
A company sells its product for $140 per unit and their fixed costs are $21,760 per...
A company sells its product for $140 per unit and their fixed costs are $21,760 per month. Suppose the company's break-even point is 340 units, then their variable cost per unit is
Wallyworld Company manufactures a product with the following costs per unit at the expected production level...
Wallyworld Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: Direct materials     $12 Direct Labor        36 variable manufacturing overhead 18 fixed manufacturing overhead 24 The company has the capacity to produce 90,000 units. The product regularly sells for $120. If a wholesaler offered to buy 4,500 units for $100 each, the effect of the special order on income would be a a. $450,000 increase b. $45,000 increase c....
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT