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 (16,000 units) of the cream and is considering the purchase of the product from an outside supplier for $4.60 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 (16,000 units $10.5)	$	168,000
Unit-level materials costs (16,000 units $1.50)		(24,000	)
Unit-level labor costs (16,000 units $0.60)		(9,600	)
Unit-level overhead costs (16,000 $0.20)		(3,200	)
Unit-level selling expenses (16,000 $0.30)		(4,800	)
Contribution margin		126,400
Skin cream production supervisors salary		(45,000	)
Allocated portion of facility-level costs		(11,500	)
Product-level advertising cost		(35,000	)
Contribution to companywide income	$	34,900

Required:

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

Total avoidable costs

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

Total avoidable costs - (per unit)

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 26,000 units). Calculate the total avoidable costs.

Total avoidable costs ---

c-2.

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

	Make
	Buy