Problem 13-25 Effects of the level of production on an outsourcing decision LO 1
ID: 2338123 • Letter: P
Question
Problem 13-25 Effects of the level of production on an outsourcing decision LO 13-3 Rundle Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Rundle produces a relatively small amount (15,000 units) of the cream and is considering the purchase of the product from an outside supplier for $5.40 each. If Rundle purchases from the outside supplier, it would continue to sell and distribute the cream under its own dbrand name. Rundle's accountant constructed the following profitability analysis: Revenue (15,000 units $13.50) $202,500 Unit-level materials costs (15,000 units x $1.40) Unit-level labor costs (15,000 units x $0.80) Unit-level overhead c sts (15,000 x $0.20) Unit-level selling expenses (15,000 x $0.60) (12,000) (3,000) (9,000) 157,500 (53,000) (13,400) (48,000) ces Contribution margin Skin cream production supervisor's salary Allocated portion of facility-level costs Product-level advertising cost Contribution to companywide income $ 43,100 Required a. Identify the cost items relevant to the make-or-outsource decision n2 chould Rundle continue to make the nroduct or buy it fromExplanation / Answer
a Costs Items relevant to the make or outsource decision Unit level material costs Unit level labor costs Unit level overhead costs Skin cream production supervisor salary b Calculation of avoidable cost per unit Material costs per unit 1.4 Labor costs per unit 0.8 Overhead costs 0.2 Skin cream production supervisor salary 3.53 53000/15000 Total avoidable cost per unit 5.93 Since the avoidable cost per unit is greater than cost per unit to buy. Rundell should buy it from the supplier. c Calculation of avoidable cost per unit at 27000 level Material costs per unit 1.4 Labor costs per unit 0.8 Overhead costs 0.2 Skin cream production supervisor salary 1.96 (53000/27000 Total avoidable cost per unit 4.36 Rundell should make the product at this level as avoidable cost to manufacture is less.