Question

Auntie E’s reports the following costs to make 17.5 oz. Lemonade:

Auntie E’s 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

Johnson Manufacturing offers to sell Auntie E the bottles for $.25. The capacity now used to make bottles will become idle if the company purchases the bottles and one supervisor with a fixed cost salary of $60,000 would be eliminated if the bottles are purchased. Complete a costs to make vs.buy the 17.5 oz. bottles excel sheet. Should Auntie E make or buy the bottles?

            2.         If Auntie E 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. Prepare a schedule that compares the four alternative courses of action:

1. Make

2. Buy and leave facilities idle

3. Buy and use facilities for other activities

4. Buy and rent out facilities

Which alternative would yield the lowest net cost?

Answer 1

Part-1

Make Vs Buy
Cost of Purchase of bottle		250000
Less: Saving Variable cost of make Bottle		175000
Less: Saving in Fixed Cost		60000
Excess Cost incurred due to Buy Bottle		15000

Auntie E Should make the bottle.

Part-2

1. If Makes the Bottle inhouse cost incurred
		Total
Variable cost of manufacturing Bottle		175000
Fixed will Not considered
		175000
2. If Buys the Bottle & Leave the facility Idle
		Total
Cost of Purchase of bottle		250000
Less: Saving in Fixed Cost		60000
Net Cost		190000
3. If Buys the Bottle & Use the facility for other activity
		Total
Cost of Purchase of bottle		250000
Less Additional Contribution earn from other activity		75000
Net Cost		175000
3. If Buys the Bottle & Use the facility for rent out
		Total
Cost of Purchase of bottle		250000
Less: Saving in Fixed Cost		60000
Less: Income Earned from Rent out facility		55000
Net Cost		135000

Option 4: Purchase the bottle and Rent out the facility will give lowest net cost.