Question

Structuring a Make-or-Buy Problem

Fresh Foods, a large restaurant chain, needs to determine if it would be cheaper to produce 5,000 units of its main food ingredient for use in its restaurants or to purchase them from an outside supplier for $12 each. Cost information on internal production includes the following:

	Total Cost		Unit Cost
Direct materials	$25,000		$ 5.00
Direct labor	15,000		3.00
Variable manufacturing overhead	7,500		1.50
Variable marketing overhead	10,000		2.00
Fixed plant overhead	30,000		6.00
Total	$87,500		$17.50

Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price.

Required:

1. What are the alternatives for Fresh Foods?
Make the ingredient in house or buy it externally.

2. List the relevant cost(s) of internal production and of external purchase.

All of the above

3. Which alternative is more cost effective?
Make the ingredient in-house

By how much?
$

4. Now assume that 20% of the fixed overhead can be avoided if the ingredient is purchased externally. Which alternative is more cost effective?
Buy

By how much?
$

Determining the Optimal Product Mix with One Constrained Resource

Comfy Fit Company manufactures two types of university sweatshirts, the Swoop and the Rufus, with unit contribution margins of $5 and $15, respectively. Regardless of type, each sweatshirt must be fed through a stitching machine to affix the appropriate university logo. The firm leases seven machines that each provides 1,000 hours of machine time per year. Each Swoop sweatshirt requires 6 minutes of machine time, and each Rufus sweatshirt requires 20 minutes of machine time.

Assume that there are no other constraints.

Required:

1. What is the contribution margin per hour of machine time for each type of sweatshirt? When computing your answers, round machine time per unit to two decimal places. Round your final answers to the nearest dollar.

	Contribution Margin
Swoop	$ 50
Rufus	$ 45

2. What is the optimal mix of sweatshirts? If an amount is zero, enter "0".

	Optimal Mix
Swoop	units
Rufus	units

3. What is the total contribution margin earned for the optimal mix?
$

Determining the Optimal Product Mix with One Constrained Resource and a Sales Constraint

Comfy Fit Company manufactures two types of university sweatshirts, the Swoop and the Rufus, with unit contribution margins of $5 and $15, respectively. Regardless of type, each sweatshirt must be fed through a stitching machine to affix the appropriate university logo. The firm leases seven machines that each provides 1,000 hours of machine time per year. Each Swoop sweatshirt requires 6 minutes of machine time, and each Rufus sweatshirt requires 20 minutes of machine time.

Assume that a maximum of 40,000 units of each sweatshirt can be sold.

Required:

1. What is the contribution margin per hour of machine time for each type of sweatshirt? When computing your answers, round machine time per unit to two decimal places. Round your final answers to the nearest dollar.

	Contribution Margin
Swoop	$ 50
Rufus	$ 45

2. What is the optimal mix of sweatshirts? When computing your answers, round machine time per unit to two decimal places. Round your final answers to the nearest whole unit.

	Optimal Mix
Swoop	units
Rufus	units

3. What is the total contribution margin earned for the optimal mix?
$

Answer 1