Question

Make or Buy Assignment

Yellow Moon Corporation manufactures sleeping bags; the selling price of the regular product is $180, while the manufacturing costs per unit were as follows:

Details	Per unit	1,000 units
Direct materials	90	90,000
Direct labor	30	30,000
Manufacturing overhead 60% variable	15	15,000
Fixed selling costs	20	20,000
Total	155	155,000

Yellow Moon Corporation received a special order to manufacture 300 sleeping bags for $140 per unit.

These sleeping bags require special materials that will cost less $8 per unit; labor cost for these sleeping bags will remain the same.

Fixed selling costs represents the cost of Yellow Moon Corporation’s annual advertising campaign.

The current equipment is working in full capacity, accordingly accepting the special order will require buying new equipment that will cost $6,500. This equipment will not be used for increasing production capacity for Yellow Moon Corporation  

Required:

1. should the special order be accepted? Show your computations.
2. If your recommendation was not to accept the special order; what will be the minimum price per unit for special order to be accepted based on CM ratio of original product?

Answer 1

New product contribution margin
	per unit	300 units
Selling price (A)	140	42000
Direct material	82	24600
( $ 8 less)
labour cost	30	9000
Manufacturing overhead variable part	9	2700	only variable cost are considered because fixed cost will remain same.
( 60% of 15)
Total variable cost (B)	121	36300
Contribution	19	5700
Less : Fixed cost new machine		6500
Profit		-800
As, the profit from the special order is negative i.e. loss same should not be accepted.
Origian product CM ratio	Per unit
Selling price (A)	180
Direct material	90
labour cost	30
Manufacturing overhead variable part	9
( 60% of 15)
Total variable cost (B)	129
Contribution	51
CM ration	28.33	%
	=(51/180*100)
Minimum price per unit based on original product CM ratio
let the price = p
p-121	=p*28.33%
.7167p	=121
p	=121/.7167
p	168.83
Required minimum Price	$ 168.83