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 (15,000 units) of the cream and is considering the purchase of the product from an outside supplier for $7.20 each. If Koch purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Kochsaccountant constructed the following profitability analysis.

Revenue (15,000 units $16)	$	240,000
Unit-level materials costs (15,000 units $2.00)		(30,000	)
Unit-level labor costs (15,000 units $1.50)		(22,500	)
Unit-level overhead costs (15,000 $0.50)		(7,500	)
Unit-level selling expenses (15,000 $0.80)		(12,000	)
Contribution margin		168,000
Skin cream production supervisors salary		(60,000	)
Allocated portion of facility-level costs		(30,000	)
Product-level advertising cost		(40,000	)
Contribution to companywide income	$	38,000

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?

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 25,000 units). Calculate the total avoidable costs.

c-2.	At this level of production, should Koch make or buy the cream?
	Make Buy