Problem 13-25 Effects of the level of production on an outsourcing decision LO 13-3

Adams Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Adams 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 Adams purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Adamss accountant constructed the following profitability analysis:

Revenue (16,000 units $10.50)	$	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

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 Adams continue to make the product or buy it from the supplier?
3. Suppose that Adams is able to increase sales by 10,000 units (sales will increase to 26,000 units). Calculate the total avoidable costs. At this level of production, should Adams make or buy the cream?

Complete this question by entering your answers in the tabs below. Required A Required B Required C Identify the cost items relevant to the make-or-outsource decision. Total avoidable costs Complete this question by entering your answers in the tabs below. Required A Required B Required C What is the avoidable cost per unit if the outsourcing decision is taken? Should Adams continue to make the product or buy it from the supplier? (Round your answer to 2 decimal places.) per unit Total avoidable costs Should Adams continue to make the product or buy it from the supplier? Required A Required C > Complete this question by entering your answers in the tabs below. Required A Required B Required C Suppose that Adams is able to increase sales by 10,000 units (sales will increase to 26,000 units). Calculate the total avoidable costs. At this level of production, should Adams make or buy the cream? Total avoidable costs At this level of production, should Adams make or buy the cream?