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*In columns (a) and (b), parentheses denote costs, and numbers
without parentheses are revenues.
In column (c), parentheses denote differential items favoring
option (b).
1. Relevant data:
Current sales value for unmodified parts .......................................$7,000
Sales value for modified parts ......................................................... 20,300
Modification costs ............................................................................. 10,000
Irrelevant data:
Current book value of inventory ...................................................... 19,500
Paint and
Supplies Carpeting Wallpaper
1.
Food
Process
Blender or
Unit cost if purchased from an outside supplier ................. $60 $114
Incremental unit cost if manufactured:
Direct material ...................................................................... $18 $ 33
Direct labor ...........................................................................
12 27
Variable overhead
$48 $30 per hour fixed ................................................... 18
$96 (2)($30 per hour fixed) ............................................ 36
Total ....................................................................................
$48 $ 96
Unit cost savings if manufactured ......................................... $12 $ 18
Machine hours required per unit ........................................... 1 2
Cost savings per machine hour if manufactured
$12 1 hour ..........................................................................$12
$18 2 hours ........................................................................ $ 9
Conclusion:Manufacture....................................20,000 blenders
Manufacture........................15,000 food processors
Purchase 13,000 food processors
2. If the companys management team is able to reduce the
direct material cost per food processor to $18 ($15 less than
previously assumed), then the cost savings from
manufacturing a food processor are $33 per unit ($18
savings computed in requirement (1) plus $15 reduction in
material cost):
Food
Process
Blender or
New unit cost savings if manufactured ...................... $12.00 $33.00
Machine hours required per unit ................................. 1 MH 2 MH
Cost savings per machine hour if manufactured
$12 1 hour ................................................................ $12.00
$33 2 hours .............................................................. $16.50
Standard Enhanced
Total contribution margin:
1,000 units x $474; 800 units x $474,000 $480,000
$600.
Less: Marketing and 20,000 30,000
advertising..
Income $454,000 $450,000