69. American Motors manufactures automobiles. Currently, the company manufactures its own carpet mats with the following unit cost per set when 25,000 sets are manufactured:
Direct materials
$25.00
Direct labor
15.00
Variable overhead
5.00
Fixed overhead
10.00
Total
$55.00
Another manufacturer has offered to supply American Motors with the mats at a cost of $50.00 per set. If American outsources the making of the carpet mats, fixed overhead costs are expected to decrease by 80%.Required:
A.
List at least two qualitativefactors that American Motors should consider in this make or buy decision.
B.
What are the relevant costs per set of making the carpet mats themselves?
C.
What are the relevant costs per set of outsourcing the carpet mats?
D.
From a quantitative basis, should they make or buy the carpet mats? By what amount will the company’s net income increase or decrease if they outsource? Show calculations.
70. Ergo Products manufactures a variety of ergonomic household tools including a cordless drill. The cordless drill comes with a battery recharger. Currently, the company manufactures its own recharger for the drill with the following unit costs:
Direct materials
$3.00
Direct labor
$3.00
Variable overhead
$1.00
In addition, when 5,000 rechargers are produced each year, Ergo applies $2 of fixed overhead costs to each recharger. Another manufacturer has offered to supply Ergo with a recharger at a cost of $8 each. If Ergo accepts the offer, 80% of the fixed overhead allocated to the rechargers will be avoidable.Required:
A.
List at least two qualitative factors that Ergo Products should consider in this make or buy decision.
B.
What is the relevant cost of each recharger if they make it themselves?
C.
What is the relevant cost of each recharger if they outsource?
D.
From a quantitative basis, should they make or buy the rechargers? By what amount will the company’s net income increase or decrease if they outsource?
71. Kane Manufacturing has three product lines: A, B, and C. The following information is available for each product line:
A
B
C
Total
Sales
$600,000
$450,000
$300,000
$1,350,000
Variable costs
200,000
150,000
230,000
580,000
Contribution margin
400,000
300,000
70,000
770,000
Fixed costs
75,000
60,000
85,000
220,000
Net income
$325,000
$240,000
$ (15,000)
$550,000
Management is considering dropping product line C.Required:
A.
What is one qualitative factor that Kane should consider before dropping product line C?
B.
If it is determined that all of product line C’s fixed costs are avoidable, what would be the effect on the company’s overall net income if it were dropped?
C.
If it is determined that none of product line C’s fixed costs are avoidable, what would be the effect on the company’s overall net income if it were dropped?
D.
If it is determined that half of product line C’s fixed costs are avoidable, what would be the effect on the company’s overall net income if it were dropped?
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