Great Company manufactures 60,000 units of part XL-40 each year for use on its production line. The following are the costs of making part XL-40: Direct material Total Costs 60,000 unit Cost per unit Br. 480, 000 Br.8 Direct labor 360, 000 6 Variable factory overhead (FOH) 180, 000 3 Fixed FOH 360, 000 6 Total manufacturing costs Br. 1, 380, 000 Br.23 Another manufacturer has offered to sell the same part to Great for Br.21 each. The fixed overhead consists of depreciation, property taxes, insurance, and supervisory salaries. The entire fixed overhead would continue if the Great Company bought the component except that the cost of Br.120, 000 pertaining to some supervisory and custodial personnel could be avoided. Instructions: a) Should the parts be made or bought? Assume that the capacity now used to make parts internally will become idle if the pats are purchased? b) Assume that the capacity now used to make parts will be either (i) be rented to nearby manufacturer for Br. 60, 000 for the year or (ii) be used to make another product that will yield a profit contribution of Br. 250,000 per Should the company purchase them from the outside supplier?
- Weston Corporation manufactures a product that is available in both a deluxe and a regular model. The company has made the regular model for years; the deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company’s profits have steadily declined. Sales of the deluxe model have been increasing rapidly. Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $3,080,000 in overhead costs would be incurred and the company would produce and sell 10,000 units of the deluxe model and 50,000 units of the regular model. The deluxe model requires 2.0 hours of direct labor time per unit, and the regular model requires 1.0 hours. Materials and labor costs per unit are given below:
Deluxe Regular
Direct materials cost per unit $50.00 $30.00
Direct labor cost per unit $30.00 $15.00
- d) Determine the total amount of overhead that would be applied to each model for the
- Can you identify a possible explanation for the company’s declining profits? If so, what is it?
- Great Company manufactures 60,000 units of part XL-40 each year for use on its production line. The following are the costs of making part XL-40:
Direct material Total Costs 60,000 unit Cost per unit
Br. 480, 000 Br.8
Direct labor 360, 000 6
Variable factory overhead (FOH) 180, 000 3
Fixed FOH 360, 000 6
Total
Another manufacturer has offered to sell the same part to Great for Br.21 each. The fixed overhead consists of
Instructions:
- a) Should the parts be made or bought? Assume that the capacity now used to make parts internally will become idle if the pats are purchased?
- b) Assume that the capacity now used to make parts will be either (i) be rented to nearby manufacturer for Br. 60, 000 for the year or (ii) be used to make another product that will yield a profit contribution of Br. 250,000 per Should the company purchase them from the outside supplier?
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