Question

Davis Kitchen Supply produces stoves for commercial kitchens. The costs to manufacture and market the stoves at the company's normal volume of 6,000 units per month are shown in the following table:

Unit manufacturing costs
Variable materials	$	60
Variable labor		85
Variable overhead		35
Fixed overhead		70
Total unit manufacturing costs				$	250
Unit marketing costs
Variable		35
Fixed		80
Total unit marketing costs					115
Total unit costs				$	365
Unless otherwise stated, assume that no connection exists between the situation described in each question; each is independent. Unless otherwise stated, assume a regular selling price of $390 per unit. Ignore income taxes and other costs that are not mentioned in the table or in the question itself. 1. A proposal is received from an outside contractor who will make and ship 2,000 stoves per month directly to Davis’s customers as orders are received from Davis’s sales force. Davis’s fixed marketing costs would be unaffected, but its variable marketing costs would be cut by 20 percent for these 2,000 units produced by the contractor. Davis’s plant would operate at two-thirds of its normal level, and total fixed manufacturing costs would be cut by 15 percent. What in-house unit cost should be used to compare with the quotation received from the supplier? Assume the payment to the outside contractor is $225. 2. A proposal is received from an outside contractor who will make and ship 2,000 stoves per month directly to Davis’s customers as orders are received from Davis’s sales force. Davis’s fixed marketing costs would be unaffected, but its variable marketing costs would be cut by 20 percent for these 2,000 units produced by the contractor. The idle facilities would be used to produce 1,600 modified stoves per month for use in extreme climates. These modified stoves could be sold for $460 each, while the costs of production would be $285 per unit variable manufacturing expense. Variable marketing costs would be $60 per unit. Fixed marketing and manufacturing costs would be unchanged whether the original 6,000 regular stoves were manufactured or the mix of 4,000 regular stoves plus 1,600 modified stoves were produced. What in-house unit cost should be used to compare with the quotation received from the outside contractor? Assume the payment to the outside contractor is $225

Answer 1

Solution 1:

Computation of In house unit cost for 2000 stoves
Particulars	Amount
Variable material (2000 * $60)	$120,000.00
Variable labor (2000*$85)	$170,000.00
Variable overhead (2000*$35)	$70,000.00
Fixed overhead (6000*$70*15%)	$63,000.00
Variable marketing cost (2000*$35*20%)	$14,000.00
Total In house cost for 2000 stoves	$437,000.00
Per unit in house cost	$218.50

In house unit cost should be used to compare with qutoation received from supplier = $218.50

Solution 2:

Computation of In house unit cost for 2000 stoves
Particulars	Amount
Variable material (2000 * $60)	$120,000.00
Variable labor (2000*$85)	$170,000.00
Variable overhead (2000*$35)	$70,000.00
Variable marketing cost (2000*$35*20%)	$14,000.00
Contribution margin from idle facilities [1600 * ($460 - $285 - $60)]	$184,000.00
Total In house cost for 2000 stoves	$558,000.00
Per unit in house cost	$279.00

In house unit cost should be used to compare with qutoation received from supplier = $279