Individual Homework Assignment #6 Fall 2017 Page 13 of 13 Assume that Ben\'s Her
ID: 2592591 • Letter: I
Question
Individual Homework Assignment #6 Fall 2017 Page 13 of 13 Assume that Ben's Hero Kettles Inc. will continue to produce and sell at a volume of 12,000 kettles per month. This volume utilizes 90% of the Company's production capacity. The production manager received an offer from a vendor to provide the handles used in the production of Ben's Hero Kettles Inc.'s kettles. Each kettle produced by Ben's Hero Kettles Inc requires two handles. The vendor would supply the 24,000 components needed for the planned product at a delivered cost of $4.50 per unit. Ben's Hero Kettles Inc. would incur an additional cost of $0.75 per component to prepare them from inclusion in their final product Cost data relative to the production of 24,000 handles by Ben's Hero Kettles Inc reveals Direct Materials Direct Labor Variable Overhead Fixed Overhead $ 3.25 per unit $0.50 per unit $1.10 per unit $1.00 per unit The production manager estimates that Ben's Hero Kettles Inc. could eliminate $18,000 of the foxed costs allocated to the component if it outsourced its production of the vendor Analyze the decision by identifying the relevant costs. Present the relevant costs and their total amounts in the table below. alternatives. 6 points a. You will not use all of the lines for one of the Make Alternative: 24,000 handes/montth Buy Alternative: 24,000 handles/month Total Cost to Make Total Cost to Buy b. From a profitability perspective, should Ben's Hero Kettles Inc. make or buy the handles? Briefly explain(2 points)Explanation / Answer
b. From a profitability perspective, Ben's Hero Kettles Inc. should buy the the handles. Because it will result in an additional cost saving of $8,400 i.e. ($134,400 - $126,000)
Make : 24,000 handles Particulars Amount Direct Materials (24,000 x $3.25) $78,000 Direct Labor (24,000 x $0.50) $12,000 Variable Overhead (24,000 x $1.10) $26,400 Avoidable Fixed Costs $18,000 Total Cost to make $134,400