Part A - Making or Buying Decision (14 marks) Assume that a company makes 100,000 plastic...

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Part A - Making or Buying Decision (14 marks) Assume that a company makes 100,000 plastic parts per year as a component in a final product. The part is produced at a large production facility the company owns. The production facility is at capacity, which, if freed up, can be used by the company to produce other products. The production process is highly automated and all labor is considered indirect labor. Production costs for the 100,000 units are: Direct Materials Factory Overhead Indirect Labor Supplies $ 1,000,000 165,000 60,000 Production Facility Amortization: 80,000 $305,000 $ 1,305,000 A small, local company has offered to supply the part for $11.50. If the in-house production is discontinued, it is expected that half of the supplies costs and $60,000 in indirect labor costs can be avoided. All other overhead costs would continue. It is expected that if the space is freed up for other production, the company can make other products in the free space which would generate an additional $75,000 in contribution margin. Required: a. Compute the relevant costs of (i) making the part, and (ii) purchasing the part. Which alternative is less costly and by how much? (10 marks) b. Please list two qualitative factors (specific to this question) that might influence the decision about whether to make or buy the component? (4 marks) Part B - Special Order Decision (8 marks) Juliani Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 50,000 units per month is as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling & administrative expense Fixed selling & administrative expense The normal selling price of the product is $75.00 per unit. $ 30.50 $ 7.20 $ 1.30 $ 30.90 $ 1.90 $ 9.30 An order has been received from an overseas customer for 3,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $0.60 less per unit on this order than on normal sales. *Direct labor is a variable cost in this company. Required: a. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $65.60 per unit. What is the financial advantage (disadvantage) for the company if it accepts the special order? (6 marks) b. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer? (2 marks) Part A - Making or Buying Decision (14 marks) Assume that a company makes 100,000 plastic parts per year as a component in a final product. The part is produced at a large production facility the company owns. The production facility is at capacity, which, if freed up, can be used by the company to produce other products. The production process is highly automated and all labor is considered indirect labor. Production costs for the 100,000 units are: Direct Materials Factory Overhead Indirect Labor Supplies $ 1,000,000 165,000 60,000 Production Facility Amortization: 80,000 $305,000 $ 1,305,000 A small, local company has offered to supply the part for $11.50. If the in-house production is discontinued, it is expected that half of the supplies costs and $60,000 in indirect labor costs can be avoided. All other overhead costs would continue. It is expected that if the space is freed up for other production, the company can make other products in the free space which would generate an additional $75,000 in contribution margin. Required: a. Compute the relevant costs of (i) making the part, and (ii) purchasing the part. Which alternative is less costly and by how much? (10 marks) b. Please list two qualitative factors (specific to this question) that might influence the decision about whether to make or buy the component? (4 marks) Part B - Special Order Decision (8 marks) Juliani Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 50,000 units per month is as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling & administrative expense Fixed selling & administrative expense The normal selling price of the product is $75.00 per unit. $ 30.50 $ 7.20 $ 1.30 $ 30.90 $ 1.90 $ 9.30 An order has been received from an overseas customer for 3,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $0.60 less per unit on this order than on normal sales. *Direct labor is a variable cost in this company. Required: a. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $65.60 per unit. What is the financial advantage (disadvantage) for the company if it accepts the special order? (6 marks) b. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer? (2 marks)