Problem 13-25 Effects of the level of production on an outsourcing decision LO 1
ID: 2341391 • 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 brand name. Rundle's accountant constructed the following profitability analysis: ts eBook Print ferences Revenue (15,000 units x $13.50) Unit-level materials costs (15,e0e units x $1.40) Unit-level labor costs (15,000 units x $e.80) Unit-level overhead costs (15,000 x $0.20) Unit-level selling expenses (15,000 x $e.60) $202,50e (21,000) (12,900) (3,000) 9.000 157,500 (53,000) (13,400) Contribution margin Skin cream production supervisor's salary Allocated portion of facility-level costs Product-level advertising cost 48,000 Contribution to companywide income S 43,100 Required a. Identify the cost items relevant to the make-or-outsource decision, b. What is the avoidable cost per unit if the outsourcing decision is taken? Should Rundle continue to make the product or buy it from the supplier? Prev 2of 411 NextExplanation / Answer
(a) Total Avoidable Cost :-
Material Cost
21000
Labour Cost
12000
O/H Cost
3000
Supervisory Salary
53000
Total Avoidable Cost
89000
(b) Avoidable cost per unit = 89000/15000 units = $5.93
Rundle should need to BUY it from the supplier
(c) If Sales = 27000 units, Total Avoidable cost :-
Material Cost (27000 * 1.40)
37800
Labour Cost (27000 * 0.80)
21600
O/H Cost (27000 * 0.20)
5400
Supervisory Salary
53000
Total Avoidable Cost
117800
At this Level Rundle shoul MAKE the product
Material Cost
21000
Labour Cost
12000
O/H Cost
3000
Supervisory Salary
53000
Total Avoidable Cost
89000