Coed Scents, a national producer of young adult perfumes and colognes, needs to
ID: 2598140 • Letter: C
Question
Coed Scents, a national producer of young adult perfumes and colognes, needs to determine If it would be cheaper to produce 100,000 bottles of its most popular perfume, Two AM, for sale in its college town shops or to purchase them from an outside supplier for $25 each. Cost information on internal production includes the following: Total Cost $2,000,000 350,000 150,000 250,000 300,000 $3,050,000 Unit Cost 20.00 3.50 Direct materials Direct labor Variable m Variable marketing overhead overhead 2.50 3.00 $30.50Explanation / Answer
1) The coed Scents has two alternatives either to produce internally or purchase from outside supplier
2) The per unit relevant cost for internal production = Total unit cost - Fixed overhead
= $30.50-$3.00 = $27.50
(The fixed overhead is irrelevant for decision because fixed overhead do not change in both the alternatives, therefore not to be considered.)
The relevant per unit cost for external purchase = $25.00
3) The purchasing alternative is more cost effective by $2.50 per unit ($27.50-$25.00) and total $250,000(for 100,000 bottles).
4) In this case the total relevant cost of purchasing externally will increase by $350,000 which is shown as follows:-
Total relevant cost per unit of purchasing externally = $25+($350,000/100,000) = $25+$3.50 = $28.50
Total Relevant cost for internal production = $27.50
In this case the internal production is more cost effective by $1.00 per unit ($28.50-$27.50) and total $100,000 (for 100,000 bottles)