Question
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
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 (14,000 units) of the cream and is considering the purchase of the product from an outside supplier for $6.10 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 (14,000 units $12.5) | $ | 175,000 | |
Unit-level materials costs (14,000 units $1.20) | (16,800 | ) | |
Unit-level labor costs (14,000 units $0.60) | (8,400 | ) | |
Unit-level overhead costs (14,000 $0.50) | (7,000 | ) | |
Unit-level selling expenses (14,000 $0.40) | (5,600 | ) | |
Contribution margin | 137,200 | ||
Skin cream production supervisors salary | (64,000 | ) | |
Allocated portion of facility-level costs | (13,100 | ) | |
Product-level advertising cost | (46,000 | ) | |
Contribution to companywide income | $ | 14,100 | |
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? | ||||
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c-1. | Suppose that Koch is able to increase sales by 10,000 units (sales will increase to 24,000 units). Calculate the total avoidable costs. |
c-2. | At this level of production, should Koch make or buy the cream? | ||||
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