Question

The Camel Company produces 13,200 units of item Roto 454 annually at a total cost of $250,800.

Direct materials	$	26,400
Direct labor		72,600
Variable overhead		59,400
Fixed overhead		92,400
Total	$	250,800

The Yukon Company has offered to supply 13,200 units of Roto 454 per year for $18 per unit. If Camel accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of Camel's facilities could be rented to a third party for $40,920 per year. At what price would Camel be indifferent to Yukon's offer?

2.

Item N29 is used by Tyner Corporation to make one of its products. A total of 12,800 units of this Item are produced and used every year. The company's Accounting Department reports the following costs of producing Item N29 at this level of activity:

	Per Unit
Direct materials	$	7.70
Direct labor		3.50
Variable manufacturing overhead		6.30
Supervisor’s salary		3.50
Depreciation of special equipment		5.00
Allocated general overhead		3.60

An outside supplier has offered to make Item N29 and sell it to the company for $28.40 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the direct labor, can be avoided. The special equipment used to make the Item was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the Items were purchased instead of produced internally. In addition, the space used to make Item N29 could be used to make more of one of the company's other products, generating an additional segment margin of $30,800 per year for that product. What would be the impact on the company's overall net operating income of buying Item N29 from the outside supplier?

Answer 1

1) camel would be indifferentiate at a price of $19.1

	Per unit(cost/13200 units)	Total
Direct material	$2(26400/13200)	$26400
Direct labour	$5.5(72600/13200)	$72600
Variable manufacturing overheads	$4.5(59400/13200)	$59400
Available fixed cost	$4	$52800
Additional saving due to acceptance of offer	$3.1(40920/13200)	$40920
Total cost of making the product	$19.1	$252420

The total cost of making also includes the saving in cost due to acceptance of offer that is of $40920 . Fixed cost will be only $_52800 since other fixed cost will still be paid no matter what decision is taken.

2) per unit total 12800 units

	Make	Buy	Make	Buy
Direct material	$7.70		$98560(12800×7.70)
Direct labour	$3.50		$44800(12800×3 .5)
Variable manufacturing overhead	$6.30		$80640(12800×6.30)
Supervisor salary	$3.50		$44800(12800×3.50)
Opportunity cost			$30800
Purchase cost		$28.40		$363520(12800×28.40)
Total cost			$299600	$363520

Difference in favour of making = $363520-$299600 =$63920

Net operating income would decline by $63920 per year.