University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

294

Pages:

21
Author:

priethyspesees9o

Chapter 11 Relevant Costs for Decision Making Part 3 Learning Objective LO3 To prepare a make or buy analysis 11-37 The Make or Buy Decision A decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier is called a “make or buy” decision. 11-38 The Make or Buy Decision: An Example  Essex Company manufactures part 4A that is used in one of its products.  The unit product cost of this part is: Direct materials Direct labor Variable overhead Depreciation of special equip. Supervisor's salary General factory overhead Unit product cost $ 9 5 1 3 2 10 $ 30 11-39 The Make or Buy Decision  The special equipment used to manufacture part 4A has no resale value.  The total amount of general factory overhead, which is allocated on the basis of direct labor hours, would be unaffected by this decision.  The $30 unit product cost is based on 20,000 parts produced each year.  An outside supplier has offered to provide the 20,000 parts at a cost of $25 per part. Should we accept the supplier’s offer? 11-40 The Make or Buy Decision Cost Per Unit Outside purchase price $ 25 Direct materials Direct labor Variable overhead Depreciation of equip. Supervisor's salary General factory overhead Total cost $ 9 5 1 3 2 10 $ 30 Cost of 20,000 Units Buy Make $ 500,000 180,000 100,000 20,000 40,000 $ 340,000 $ 500,000 20,000 × $9 per unit = $180,000 11-41 The Make or Buy Decision Cost Per Unit Outside purchase price $ 25 Direct materials Direct labor Variable overhead Depreciation of equip. Supervisor's salary General factory overhead Total cost $ 9 5 1 3 2 10 $ 30 Cost of 20,000 Units Buy Make $ 500,000 180,000 100,000 20,000 40,000 $ 340,000 $ 500,000 The special equipment has no resale value and is a sunk cost. 11-42 The Make or Buy Decision Cost Per Unit Outside purchase price $ 25 Direct materials Direct labor Variable overhead Depreciation of equip. Supervisor's salary General factory overhead Total cost $ 9 5 1 3 2 10 $ 30 Cost of 20,000 Units Buy Make $ 500,000 180,000 100,000 20,000 40,000 $ 340,000 $ 500,000 Not avoidable; irrelevant. If the product is dropped, it will be reallocated to other products. 11-43 The Make or Buy Decision Cost Per Unit Outside purchase price $ 25 Direct materials Direct labor Variable overhead Depreciation of equip. Supervisor's salary General factory overhead Total cost $ 9 5 1 3 2 10 $ 30 Cost of 20,000 Units Buy Make $ 500,000 180,000 100,000 20,000 40,000 $ 340,000 $ 500,000 Should we make or buy part 4A? 11-44 Opportunity Cost An opportunity cost is the benefit that is foregone as a result of pursuing some course of action. Opportunity costs are not actual dollar outlays and are not recorded in the formal accounts of an organization. How would this concept potentially relate to the Essex Company? 11-45 Learning Objective LO4 To prepare an analysis showing whether a special order should be accepted 11-46 Key Terms and Concepts A special order is a one-time order that is not considered part of the company’s normal ongoing business. When analyzing a special order, only the incremental costs and benefits are relevant. 11-47 Special Orders  Jet, Inc. makes a single product whose normal selling price is $20 per unit.  A foreign distributor offers to purchase 3,000 units for $10 per unit.  This is a one-time order that would not affect the company’s regular business.  Annual capacity is 10,000 units, but Jet, Inc. is currently producing and selling only 5,000 units. Should Jet accept the offer? 11-48 Special Orders Jet, Inc. Contribution Income Statement Revenue (5,000 × $20) $ 100,000 Variable costs: Direct materials $ 20,000 Direct labor 5,000 Manufacturing overhead 10,000 $8 variable cost Marketing costs 5,000 Total variable costs 40,000 Contribution margin 60,000 Fixed costs: Manufacturing overhead $ 28,000 Marketing costs 20,000 Total fixed costs 48,000 Net operating income $ 12,000 11-49 Special Orders If Jet accepts the offer, net operating income will increase by $6,000. Increase in revenue (3,000 × $10) Increase in costs (3,000 × $8 variable cost) Increase in net income $ 30,000 24,000 $ 6,000 Note: This answer assumes that fixed costs are unaffected by the order and that variable marketing costs must be incurred on the special order. 11-50 Quick Check  Northern Optical ordinarily sells the X-lens for $50. The variable production cost is $10, the fixed production cost is $18 per unit, and the variable selling cost is $1. A customer has requested a special order for 10,000 units of the X-lens to be imprinted with the customer’s logo. This special order would not involve any selling costs, but Northern Optical would have to purchase an imprinting machine for $50,000. (see the next page) 11-51 Quick Check  What is the minimum price below which Northern Optical should not go in its negotiations with the customer? In other words, below what price would Northern Optical actually be losing money on the sale? There is ample idle capacity to fulfill the order and the imprinting machine has no further use after this order. a. $50 b. $10 c. $15 d. $29 11-52 Quick Check  What is the minimum price below which Northern Optical should not go in its negotiations with the customer? In other words, below what price would Northern Optical actually be losing money on the sale? There is ample idle capacity to fulfill the order and the imprinting machine has no further use after this Variable order. production cost $100,000 a. $50 Additional fixed cost 50,000 b. $10 Total relevant cost $150,000 c. $15 Number of units 10,000 $15 d. $29 Average cost per unit 11-53 Cost-Plus Pricing  Design and produce product.  Determine cost of product.  Determine price of product.  Add mark-up to cost of product. Will customers pay the price set by the company? 11-54 Target Costing  Determine target selling price.  Determine target cost Deduct required profit margin from target selling price.  Result is target cost  Compare target cost to currently feasible total cost.  The difference is the costreduction target  Redesign products and processes to achieve the cost-reduction target.  11-55 Target Costing Advantages • Focus on markets and customers. • Higher level of cost-consciousness. Some companies are abandoning the cost-plus approach to new product pricing in favor of target costing. 11-56