A company has been buying a part of machinery for $1000 per unit.

The Annual Fixed Cost of the unused Capacity is $1,000,000.

If the company decided to make the product it will incur material
cost of $350 per unit, labor cost of $300 per unit and variable
overhead cost of $100 per unit. The future demand is estimated as
5000 units.

Which decision is profitable for the company?

ANSWER:
Cost of making:
Direct Material $1,750,000
Direct Labor 1,500,000
Variable OH 500,000 $3,750,000
Fixed OH 1,000,000
TOTAL COST $4,750,000

Cost of buying:
Purchase cost($1000*5000) $5,000,000
Fixed cost 1,000,000
TOTAL COST $6,000,000
Since cost for Making is lesser than buying the
company should start making their own product.
Furniture Inn manufactures computer tables. Recently a supplier has offered
the tables of the same quality at $14 each with an assurance of continued
supply. The following is the budget for 4000 units for the quater ending
September 30, 20xx:

Raw Material Cost $ 20,000

Direct Wages $18,000
Production Overhead:
Variable $12,000
Fixed $14,000
Distribution Cost:
Variable $ 6000
Fixed $7500
Administration Cost:
Variable $5000
Fixed $12500
As to marginal cost(fixed cost not included)/differencial cost of production,
Should Furniture Inn accept the offer from the supplier?
ANSWER:
Cost of making:
Direct Material $20,000
Direct Labor 18,000
Variable OH 12,000
Differencial Cost $50,000

Cost of buying:
Purchase cost($14*4000) $56,000

Furniture Inn should not accept the offer of the

supplier, instead they should start making their own
product.
Product A and B in a Joint Process. At split-off point,
product A is complete whereas product B can be process
further. The following additional information is available:

Product A B
Quantity in Units 5000 10,000
Selling price per unit
At split-off $10 $2.5
If Process further $5
Cost After Split-off $20,000

Perform sell or process further decision for Product B

ANSWER:
Split-off Further Process
Revenue $25,000 $50,000
Costs 0 20,000
Net Revenue $25,000 $30,000
Gain(loss) from process $5,000

The company shoul process the product further.