Question
Question 1: Make or buy Note, the fixed costs are unavoidable. An outside supplier has offered to sell Coleman Company the grills at $22 per
Question 1: Make or buy
Note, the fixed costs are unavoidable. An outside supplier has offered to sell Coleman Company the grills at $22 per unit.Coleman Company manufactures the grills for high end outdoor camping stoves and produces 18,000 units per year. The grills, used in a few different products that Coleman Company produces has the following information:
Per Unit | |
Direct Materials | $8.00 |
Direct Labour | 5.00 |
Variable Overhead | 7.00 |
Fixed Overhead | 6.00 |
Unit Cost | $26 |
a) Complete the make or buy analysis table (3 marks)
| Production Cost per unit | Per Unit Differential Costs | |
| (18,000 units) | Make | Buy |
Direct Materials |
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Direct Labour |
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Variable Overhead |
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Fixed Overhead |
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Outsource Price |
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Total Relevant Cost |
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b) Should Colman Company make or buy the grills and why (2 marks)?
c) What is the maximum price that Coleman Company would be willing to pay an outside supplier for the grills (1 mark)?
d) If Coleman Company could buy the grills for $18 from a different company, by how much will operating income increase or decrease (Show your work) (2 marks)?
e) Would you change your decision to make or buy with the new price of $18? Why (2 marks)?
Question 2: Keep or Drop
BBQ Company has three product lines. Gas barbeques, charcoal barbecues, and barbecue accessories. During the last few years charcoal barbeque sales have declined steadily leading management to question if this product is worth keeping. The contribution margin statement for the charcoal line is shown below:
BBQ Company Charcoal Barbeques Contribution Margin Statement for the Segment For the Year Ended November 30, 2017 | |
Revenue | $ 1,360,500 |
Variable Costs | 1,053,000 |
Contribution Margin | 307,500 |
Fixed Costs | 500,000 |
Operating Income (loss) | $192,500 |
Additional Information:
75% of the segments fixed costs will remain the same if the line is discontinued and the remaining 25% will no longer be incurred.
Contribution margin will increase by $125,000 in the other segments of BBQ company if the product is discontinued
Calculate the incremental effect (4 marks):
Lost Contribution Margin |
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Avoidable Fixed Costs |
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Incremental Contribution Margin (Other segments) |
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Incremental Effect |
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Should BBQ Company discontinue the Charcoal segment? Why or why not? (2 marks)
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