1.

Levy Quilting Company makes blankets that it markets through a variety of department stores. It makes the blankets in batches of 3,000 units. Levy made 30,000 blankets during the prior accounting period. The cost of producing the blankets is summarized here.

Materials cost ($29 per unit 30,000)	$	870,000
Labor cost ($25 per unit 30,000)		750,000
Manufacturing supplies ($6 30,000)		180,000
Batch-level costs (10 batches at $6,000 per batch)		60,000
Product-level costs		190,000
Facility-level costs		330,000
Total costs	$	2,380,000
Cost per unit = $2,380,000 30,000 = $79.3

Required:

a-1.	Rios Motels has offered to buy a batch of 600 blankets for $65 each. Levy's normal selling price is $94 per unit, calculate the relevant cost per unit for the special order.

a-2.

Should Levy accept the special order?

	Yes
	No

b-1.	Rios offered to buy a batch of 3,000 blankets for $65 per unit, calculate the relevant cost per unit for the special order.

b-2.

Should Levy accept the special order?

Koch Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Koch produces a relatively small amount (18,000 units) of the cream and is considering the purchase of the product from an outside supplier for $5.20 each. If Koch purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Koch accountant constructed the following profitability analysis.

Revenue (18,000 units $13.0)	$	234,000
Unit-level materials costs (18,000 units $1.30)		(23,400	)
Unit-level labor costs (18,000 units $0.50)		(9,000	)
Unit-level overhead costs (18,000 $0.60)		(10,800	)
Unit-level selling expenses (18,000 $0.30)		(5,400	)
Contribution margin		185,400
Skin cream production supervisors salary		(64,000	)
Allocated portion of facility-level costs		(12,800	)
Product-level advertising cost		(45,000	)
Contribution to companywide income	$	63,600

Required:

a.	Identify the cost items relevant to the make-or-outsource decision.

b-1.	What is the avoidable cost per unit if the outsourcing decision is taken? (Round your answer to 2 decimal places.)

b-2.

Should Koch continue to make the product or buy it from the supplier?

	Make
	Buy

c-1.	Suppose that Koch is able to increase sales by 10,000 units (sales will increase to 28,000 units). Calculate the total avoidable costs.

c-2.

At this level of production, should Koch make or buy the cream?

	Make
	Buy

	Yes
	No