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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?
Make
Buy

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?
Make
Buy

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