Baird Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Baird produces a relatively small amount (17,000 units) of the cream and is considering the purchase of the product from an outside supplier for $4.70 each. If Baird purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Baird’s accountant constructed the following profitability analysis:

 

1. Identify the cost items relevant to the make-or-outsource decision.

2. What is the avoidable cost per unit if the outsourcing decision is taken? Should Baird continue to make the product or buy it from the supplier?

3. Suppose that Baird is able to increase sales by 10,000 units (sales will increase to 27,000 units). Calculate the total avoidable costs. At this level of production, should Baird make or buy the cream?

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Revenue (17,000 units x $11.00) Unit-level materials costs (17,000 units x $1.60) Unit-level labor costs (17,000 units x $0.70) Unit-level overhead costs (17,000 x $0.30) Unit-level selling expenses (17,000 x $0.40) Contribution margin Skin cream production supervisor's salary Allocated portion of facility-level costs Product-level advertising cost $187,000 (27, 200) (11,900) (5,100) (6,800) 136,000 (48,000) (11,800) (39,000) $ 37,200 Contribution to companywide income Revenue (17,000 units x $11.00) Unit-level materials costs (17,000 units x $1.60) Unit-level labor costs (17,000 units x $0.70) Unit-level overhead costs (17,000 x $0.30) Unit-level selling expenses (17,000 x $0.40) Contribution margin Skin cream production supervisor's salary Allocated portion of facility-level costs Product-level advertising cost $187,000 (27, 200) (11,900) (5,100) (6,800) 136,000 (48,000) (11,800) (39,000) $ 37,200 Contribution to companywide income