1

Week 1 Exercises
ACC/543
September 19, 2016
Professor Thomas Benscoter

Week 1 Exercises
4.16 Make or buy Yoklic Corporation currently manufactures a subassembly for its main
product. The costs per unit are as follows:
Q4, Q6
Direct materials

$ 4.00

Direct labor

30.00

Variable overhead

15.00

Fixed overhead

25.00

Total

$74.00

Regina Corp has contacted Yoklic with an offer to sell it 5,000 subassemblies for
$55.00 each.
REQUIRED:
A. Should Yoklic make or buy the subassemblies? Create a schedule that shows the
total quantitative differences between the two alternatives.
Making Subassemblies
(per unit)

Buying Assemblies
(per unit)

Direct Materials

4.00

---

Direct Labor

30.00

---

Variable Overhead

15.00

---

Fixed Overhead

25.00

25.00

Purchase Cost
Total unit cost

55.00
$74.00

$80.00

Yoklic should make the subassemblies because it is $6 extra per unit if he purchases
them.
B. The accountant decided to investigate the fixed costs to determine whether any
incremental changes would occur if the subassembly were no longer
manufactured. The accountant believes that Yoklic will eliminate $50,000 of fixed
overhead if it accepts the proposal. Does this new information change the
decision? Show your calculations.

Making Subassemblies

Buying Assemblies

3
(5,000 units)

(5,000 units)

Direct Materials

20,000

---

Direct labor

150,000

---

Variable overhead

75,000

---

Fixed cost

125,000

75,000

Purchase Cost

275,000

Total Cost

370,000

350,000

Units

5,000

5,000

Per unit Cost

$74

$70

Working Fixed Cost 25 x 5,000 units = 125,000 50,000 = $75,000

If the accountant is correct then eliminating $50,000 fixed costs will save Yoklic $20,000,
if he chooses to purchase the subassemblies. The opportunity cost if Yoklic chooses to
manufacture is $20,000.
C. Ignore the information in part (B). Now suppose Yoklic could use the capacity
released under the buy alternative to make a different subassembly that it currently
purchases from a vendor for $20. The manufacturing engineer believes that the company
can use the existing equipment to manufacture the subassembly for $13 each (direct
materials, direct labor, and variable overhead). The firm uses about 5,000 of these
subassemblies. Create a schedule that shows the difference between the two alternatives.

Making Subassemblies

Buying Subassemblies

Direct Materials

---

---

Direct Labor

---

---

4
Variable overhead

65,000

---

Fixed overhead

125,000

125,000

Purchase Cost

---

100,000

Total Cost

$190,000

$225,000

4.18 Special order The Cone Head House sells ice cream cones in a variety of flavors.
Data for a recent week appear here:

Q2
Revenue (1,000 cones @ $1.50 each)

$1,500

Cost of ingredients

530

Rent

300

Store attendant

600

Income

70

The Cone Heads manager received a call from a university student club requesting a bid
on 100 cones to be picked up in three days. The cones could be produced in advance by
the store attendant during slack periods and then stored in the freezer. Each cone requires
a special plastic cover that costs $0.05.
REQUIRED:
A. What are the managers decision options?
The decision options are to decide to complete the special order from the university
student club or decline their order and setting a price.

5
B. What quantitative information is relevant for this decision?
The quantitative information relevant for this decision, the manager must know the
costs for the cone order. The variable cost is $530 for 1,000 cones and the special
plastic cover cost of $0.05 per cone. The fixed cost remains the same irrespective of
whether the order is accepted or rejected. The fixed costs include rent and store
attendant that will not change if the special order is accepted, so they are irrelevant
costs.
C. Using the general decision rule, what is the minimum acceptable price per cone
for this special order?
The minimum acceptable price per cone for this special order is $0.58.
($530/1,000) +$.05 = 0.58
D. Explain why Cone Heads managers might be willing to sell cones at the price
you calculated in part (C).
The Head Manager of cone is doing so for marketing of its product. By selling cones
at the breakeven price, new customers may eat the ice cream, and in future will come
into the store to buy. Thus increase in sales and the brand is better known throughout
the university.

4.20 Outsourcing, business risk Saguaro Systems produces and sells stereo systems for
MP3 players. The following information has been collected about the costs related to the
systems:
Q4, Q6
Selling price per unit

$70

Production costs per unit

Direct materials

$22

Direct labor

16

Variable overhead

Total fixed overhead

$360,000

Saguaro normally produces 25,000 of these systems per year.

The managers are deciding whether to outsource production to a Mexican company that
has offered to produce these systems for $48 each. The managers estimate that $260,000
of Saguaros fixed costs could be eliminated if they accept the offer. Direct labor
employees are guaranteed pay for 40 hours per week and rarely work overtime.
REQUIRED:
A. Which type of non-routine operating decision is involved here? What are the
managers decision options? What quantitative information is relevant to the
decision?
This would be a make or buy decision problem. The manager can choose to make the
speakers or buy them from another company. The variable cost of making the system and
any avoidable fixed cost are relevant and is the outside purchase price
B. Perform a quantitative analysis for the decision, and present your results in a
schedule.
Make

Buy

Purchase Price

---

48.00

Variable Cost

---

Direct materials

22.00

Direct labor

16.00

Variable overhead

2.00

Avoidable fixed cost

10.40

7
Total

50.40

48.00

Avoidable fixed cost = 26,000 / 25,000 = 10.40

C. Under the general decision rule for this type of decision, what production level is
required for Saguaros managers to be indifferent?
The manager will be indifferent at the volume where the cost in house is the same as the
cost of outsourcing:
40x + 260,000 = 48x
8x = 260,000
X = 32,500 systems
D. List as many business risks as you can for this decision.
Will the company be reliable and timely with their delivery and the quality of the
speakers? Will the company increase the price for the next order? Will the company be
able to discontinue a contract if the sales orders fall? Will the company find an alternative
use for the production that brings in the contribution margin?