Question

Matchless Corp. manufactures radios that it uses in several of its products. Management is considering whether to continue manufacturing the radios or to buy them from an outside source. The following information is available:
1. The company needs 20,000 radios per year. The radios can be purchased from an outside supplier at a cost of $50 per unit.
2. The unit cost of manufacturing the radios is $85, computed as follows:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 400,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
Factory overhead:
Variable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350,000
Fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,000
Total manufacturing costs . . . . . . . . . . . . . . . . . . .... $1,700,000
Cost per unit ($1,700,000 ÷ 20,000 units) . . . . . . . . . . . $85
3. Discontinuing the manufacture of radios will eliminate all the raw materials and direct labor costs but will eliminate only 80 percent of the variable factory overhead costs.
4. If the radios are purchased from an outside source, machinery used in the production of radios will be sold at its book value. Accordingly, no gain or loss will be recognized. The sale of this machinery would also eliminate $5,000 in fixed costs associated with depreciation and taxes.
No other reductions in fixed factory overhead will result from discontinuing the production of radios.

Instructions
a. Prepare a schedule in the format illustrated in Exhibit 21–6 of the text to determine the incremental cost or benefit of buying the radios from the outside supplier. On the basis of this schedule, would you recommend that the company-manufacture the radios or buy them from the outside source?
In Exhibit 21–6


b. Assume that if the radios are purchased from the outside source, the factory space previously used to produce radios can be used to manufacture an additional 8,000 timepieces per year. Timepieces have an estimated contribution margin of $15 per unit. The manufacture of the additional timepieces would have no effect on fixed factory overhead. Would this new assumption change your recommendation as to whether to make or buy the radios? In support of your conclusion, prepare a schedule showing the incremental cost or benefit of buying the radios from the outside source and using the factory space to produce additionaltimepieces.


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  • CreatedApril 17, 2014
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