Question

Rundle Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Rundle produces a relatively small amount (15,000 units) of the cream and is considering the purchase of the product from an outside supplier for $5.40 each. If Rundle purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Rundle’s accountant constructed the following profitability analysis:

Revenue (15,000 units × $13.50)	$	202,500
Unit-level materials costs (15,000 units × $1.40)		(21,000	)
Unit-level labor costs (15,000 units × $0.80)		(12,000	)
Unit-level overhead costs (15,000 × $0.20)		(3,000	)
Unit-level selling expenses (15,000 × $0.60)		(9,000	)
Contribution margin		157,500
Skin cream production supervisor’s salary		(53,000	)
Allocated portion of facility-level costs		(13,400	)
Product-level advertising cost		(48,000	)
Contribution to companywide income	$	43,100

Required

Identify the cost items relevant to the make-or-outsource decision.

What is the avoidable cost per unit if the outsourcing decision is taken?

Suppose that Rundle is able to increase sales by 12,000 units (sales will increase to 27,000 units). Calculate the total avoidable costs.

Answer 1

Answer:

1

Identify the cost items relevant to the make-or-outsource decision.

cost items relevant to the make decision

1. Unit-level materials costs
2. Unit-level labor costs
3. Unit-level overhead costs
4. Skin cream production supervisor’s salary

cost items relevant to the Outsource decision.

1. Outsider supplier cost

___________________________________________

2

What is the avoidable cost per unit if the outsourcing decision is taken?

Unit-level materials costs	1.4
Unit-level labor costs	0.8
Unit-level overhead costs	0.2
Skin cream production supervisor’s salary (53000/15000)	3.53
Total avoidable Units cost	5.93

Total avoidable Units cost =$5.93

_________________________________________________________

Suppose that Rundle is able to increase sales by 12,000 units (sales will increase to 27,000 units). Calculate the total avoidable costs.

		Total for 17000 units
Unit-level materials costs	1.4	37800
Unit-level labor costs	0.8	21600
Unit-level overhead costs	0.2	5400
Skin cream production supervisor’s salary (53000 )	1.96	53000
Total avoidable cost	4.36	117800.00

Total avoidable cost for 27000 units=$117,800