Question

Below is Hue’s Honey costs to make 17.5 oz. bottles for its Drinks:

Hue’s Honey Cost of Making 17.5 Ounce Bottles
	Total Cost for 1,000,000 Bottles	Cost per Bottle
Direct materials	$   85,000	$.085
Direct labor	30,000	.030
Variable factory overhead	60,000	.060
Fixed factory overhead	85,000	.085
Total costs	$ 260,000	$ .26

1.Another manufacturer (JiffyK) offers to sell Hues Honey bottles for $.25. The capacity now used to make bottles will become sluggish if the company purchases the bottles. One supervisor with a fixed cost salary of $60,000 would be removed if the bottles are purchased. Complete a schedule that compares the costs to make vs. buy the 17.5 oz. bottles. Should Hues Honey make or buy the bottles?

2.Presume Hue’s Honey can use the released facilities in another manufacturing activity that makes a contribution to profits of $75,000 or can rent out the facilities released for $55,000.

3. Prepare a schedule that compares the four alternative courses of action: Make, Buy and leave facilities idle, Buy and use facilities for other activities and Buy and rent out facilities. Which alternative would yield the lowest net cost?

Answer 1

Statement showing least net costper unit of 17.5oz bottle under various Alternatives

	Manufacture	Buy+No alternativeuse of fecilites relased	BUY+Facilities uesd for Another man'activity	BUY+Facilities are Rented out
TOTALCOST OF MAN"R (or)BUY	260000	250000	250000	250000
+Un aviodable fixed cost	-----	25000	25000	25000
(-)profit/rent recived	-----	-------	(75000)	(60000)
Net TotalCost	2,60,000$	2,75,000$	2,00,000$	2,15,000$
Number of units	10,00,000	1000000	10,00,000	10,00,000
Net cost per unit	0.26$	0.275$	0.2$	0.215$

Decission:

• ?Least net cost per unit is 0.2$
• in alternative BUY+USE OF RELEASED FACILITES FOR ANOTHER MANUFACTUREING ACTIVITY

Working:

• One supervisor with a fixed cost salary of $60,000 would be removed if the bottles are purchased. so avidable fixed cost
• ?unavoidable fixed cost=total fixed cost-avoidable fixed cost
• ?    i.e 25000=85000-60000
• ?Total cost if Buy=10,00,000units*025$
• ? =2,50,000$