The Coil Company manufactures 10,000 rolls of cable each period. The cable is us
ID: 2474093 • Letter: T
Question
The Coil Company manufactures 10,000 rolls of cable each period. The cable is used as an input for producing several other products that Coil manufactures. The full manufacturing costs for a batch of 100 rolls of cable are: Direct materials $170 Direct labor 100 Variable manufacturing overhead 100 Average fixed manufacturing overhead 175 Total $545 The fixed manufacturing overhead is comprised of depreciation expenses related to prior investments in facilities and equipment that are used in the manufacturing of the cable. These assets have no other use than for the manufacturing of the cable. An outside supplier has offered to sell Coil the 10,000 rolls of cable necessary to meet production needs this period for a lump-sum of $45,000. If Coil accepts this outside supplier’s offer, how much better or worse off will the company be?
Explanation / Answer
Calculation of Profit / (Loss) If Coil accepts this outside supplier’s offer:
Saving in Direct materials costs (10,000 rolls*170 / 100)
$ 17,000.00
Add: Saving in Direct Labor costs (10,000 rolls*100 / 100)
$ 10,000.00
Add: Saving in Variable manufacturing overhead costs (10,000 rolls*100 / 100)
$ 10,000.00
Less: Cost of rolls from outside supplier
$(45,000.00)
Net (Loss) If Coil accepts this outside supplier’s offer
$ (8,000.00)
hence the company will be worse by $8000 loss if it accepts this outside supplier’s offer
Calculation of Profit / (Loss) If Coil accepts this outside supplier’s offer:
Saving in Direct materials costs (10,000 rolls*170 / 100)
$ 17,000.00
Add: Saving in Direct Labor costs (10,000 rolls*100 / 100)
$ 10,000.00
Add: Saving in Variable manufacturing overhead costs (10,000 rolls*100 / 100)
$ 10,000.00
Less: Cost of rolls from outside supplier
$(45,000.00)
Net (Loss) If Coil accepts this outside supplier’s offer
$ (8,000.00)
hence the company will be worse by $8000 loss if it accepts this outside supplier’s offer