Townsend Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Townsend produces
Townsend Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Townsend produces a relatively small amount (15,000 units) of the cream and is considering the purchase of the product from an outside supplier for $9 each. If Townsend purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Townsends accountant constructed the following profitability analysis:
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| Revenue (15,000 units $20) | $ | 300,000 | |
| Unit-level materials costs (15,000 units $2.50) | | (37,500 | ) |
| Unit-level labor costs (15,000 units $1.80) | | (27,000 | ) |
| Unit-level overhead costs (15,000 $0.70) | | (10,500 | ) |
| Unit-level selling expenses (15,000 $1.00) | | (15,000 | ) |
| Contribution margin | | 210,000 | |
| Skin cream production supervisors salary | | (75,000 | ) |
| Allocated portion of facility-level costs | | (45,000 | ) |
| Product-level advertising cost | | (50,000 | ) |
| Contribution to companywide income | $ | 40,000 | |
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Required Identify the cost items relevant to the make-or-outsource decision. What is the avoidable cost per unit if the outsourcing decision is taken? Should Townsend continue to make the product or buy it from the supplier? Suppose that Townsend is able to increase sales by 10,000 units (sales will increase to 25,000 units). Calculate the total avoidable costs. At this level of production, should Townsend make or buy the cream?
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| | | | | Total avoidable costs | | per unit | | Should Townsend continue to make the product or buy it from the supplier? | | |
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| | | | | | Total avoidable costs | | | At this level of production, should Townsend make or buy the cream? | | |
