Question

Question 3 Lewis Toy Company manufactures stuffed animals in house. An outside supplier Nguyen Company has offered to supply the stuffed animals at $22 each. Lewis Toy Company requires 10,000 stuffed animals each year. The total manufacturing product costs of the stuffed animals are as follows:

Item	Product
Price per unit	$32
Variable costs per unit
Direct material	$12
Direct labour	$ 6
Variable overhead	$ 2
Fixed overhead costs per unit	$ 3
Total unit costs	$23

The fixed overhead is an allocated expense that relates to the rent of the factory. The rent would still be incurred regardless of whether the stuffed animals are made or outsourced to Nguyen.

Required:

a) What are the alternatives Lewis Toy Company has in relation to sourcing its product?

b) List the relevant costs for each alternative?

c) What is the total relevant cost for each alternative?

d) Based on your answer to c) above, should Lewis Toy Company continue to make the product or buy it from Nguyen Company? Explain

e) Give an example of an irrelevant cost in this decision and explain why it is irrelevant

f) What are the relevant costs in a decision making context?

g) What is meant by a limiting factor (scare resource). Give two common examples.

Answer 1