Perez Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Perez produces a relatively small amount (18,000 units) of the cream and is considering the purchase of the product from an outside supplier for $5.20 each. If Perez purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Perezs accountant constructed the following profitability analysis:

Revenue (18,000 units $13.00)	$	234,000
Unit-level materials costs (18,000 units $1.30)		(23,400	)
Unit-level labor costs (18,000 units $0.50)		(9,000	)
Unit-level overhead costs (18,000 $0.60)		(10,800	)
Unit-level selling expenses (18,000 $0.30)		(5,400	)
Contribution margin		185,400
Skin cream production supervisors salary		(64,000	)
Allocated portion of facility-level costs		(12,800	)
Product-level advertising cost		(45,000	)
Contribution to company-wide income	$	63,600

Required

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

2. What is the avoidable cost per unit if the outsourcing decision is taken? Should Perez continue to make the product or buy it from the supplier?

3. Suppose that Perez is able to increase sales by 8,000 units (sales will increase to 26,000 units). Calculate the total avoidable costs. At this level of production, should Perez make or buy the cream?

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

Total avoidable costs

Total avoidable costs		per unit
Should Perez continue to make the product or buy it from the supplier?

Total avoidable costs
At this level of production, should Perez make or buy the cream?