Info:

Exhibit 1:

Custom Leather Motorcycle Accessories, LLC

Memo

To: Sterling Cousin, Comptroller

From: Punchem Out, Production Supervisor

Date: March 15, Year 6

RE: Cutouts for caribou leather seat cover - make versus purchase

Our caribou leather seat for the CXB 250 motorcycle is selling very well. I think we can improve our production if we buy our leather cutouts for the seats versus making them as we do now.

I think we will soon exceed our capacity of 1,000 seats per year with our current growth, even though we are OK for now. We could let the freed up employees work on new products instead of hiring new people as we are currently planning.

We can get the caribou leather cutouts from a native corporation in Alaska for $10 each. Our variable costs to make these is currently $22.14 per unit, according to the cost report you gave us at our last efficiency meeting. That would save us $12.14 per seat, increasing income by $17,712.

What do you think?

Custom Leather Motorcycle Accessories, LLC

Cost Sheet

After receiving the memo from Punchem, Sterling pulled out the cost figures he had distributed at the last efficiency meeting.

Caribou Leather Seat cutouts - production level 800 units

Costs

Abbreviations

Actual Costs Per Unit

Direct materialsDM$3.75Direct laborDL$2.29Variable overheadVOH$1.87Fixed overheadFOH$14.23

Questions following information:

Sterling Cousin, Comptroller for Custom Leather Motorcycle Accessories, LLC, is considering whether to continue to make or to purchase the leather cutouts for the caribou leather motorcycle seat cover. For questions 1.-3., enter the appropriate amounts in the associated cells using the information in the exhibits. Round all amounts to the nearest hundredth. Enter all amounts as positive values. For question 4., select from the option list provided whether the company should make or purchase.

Question

& Answer

1. What is the total relevant per unit production cost to make the leather motorcycle seat cover cutouts?

2. What is the effect on contribution margin per unit?

3. What is the total effect on income, assuming the current sales level, if the leather cutouts are purchased?

4. Should the company continue to make the leather cutouts for the motorcycle seats or purchase from a 3rd party? Buy or Make