Gonska manufactures 20,000 units of computer accessories per year and sells them for $9.00 each. The costs per unit are as follows:

Bailey has offered to sell Gonska the 20,000 units of part G for $5.25 per unit. Following are independent assumptions as to what would happen to the fixed costs. Gonska has enough capacity to produce and sell 25,000 units.

Give the effect on costs under each of the situations described. The regular sale price of computer accessories is irrelevant as it is the same under all scenarios.

Calculate the cost to make part G and compare the cost to buy part G under each of the assumptions.
a. The allocated fixed overhead would have to be absorbed by other products.

b. Half of the fixed overhead would remain (e.g., rent, depreciation), but Gonska would be able to produce a new product line that has a contribution margin of $4.00.

c. Half of the fixed overhead would remain but Gonska could rent out the facilities for a fixed fee of $15,000.

d. Of the allocated overhead, $5,000 would remain. Gonska is considering increasing the production of an existing product line by 12,000 units. The other product line has a contribution margin of $2.50. Gonska anticipates spending $1,500 on supply chain logistics to increase the sale of the other product line.

e. List other relevant information that you were not provided about each of the scenarios.

Transcribed Image Text:

Direct materials Direct labor Variable overhead Fixed overhead allocated Unit cost $1.50 $2.25 $0.50 $1.75 $6.00