A local dental laboratory has offered to supply Apollonia all the crowns it needs. Its price is $265 for all-porcelain crowns and $145 for porcelain-fused- to-metal crowns; however, the offer is conditional on supplying both types of crowns-it will not supply just one type for the price indicated. If the offer is accepted, the equipment used by Apollonia's laboratory would be scrapped (it is old and has no market value), and the lab facility would be closed. Apollonia uses 2,500 all-porcelain crowns and 1,000 porcelain-fused-to-metal crowns per year. Required: 1. Should Apollonia continue to make its own crowns, or should they be purchased from the external supplier? What is the dollar effect of purchasing? 2. What qualitative factors should Apollonia consider in making this decision? 3. Suppose that the lab facility is owned rather than rented and that the $22,000 is depreciation rather than rent. What effect does this have on the analysis in Requirement 1?

FINANCIAL ACCOUNTING
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Chapter1: Financial Statements And Business Decisions
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A local dental laboratory has offered to supply Apollonia all the crowns it
needs. Its price is $265 for all-porcelain crowns and $145 for porcelain-fused-
to-metal crowns; however, the offer is conditional on supplying both types of
crowns-it will not supply just one type for the price indicated. If the offer is
accepted, the equipment used by Apollonia's laboratory would be scrapped (it
is old and has no market value), and the lab facility would be closed. Apollonia
uses 2,500 all-porcelain crowns and 1,000 porcelain-fused-to-metal crowns
per year.
Required:
1. Should Apollonia continue to make its own crowns, or should they be
purchased from the external supplier? What is the dollar effect of purchasing?
2. What qualitative factors should Apollonia consider in making this decision?
3. Suppose that the lab facility is owned rather than rented and that the $22,000
is depreciation rather than rent. What effect does this have on the analysis in
Requirement 1?
4. Refer to the original data. Assume that the volume of crowns is 5,000 all
porcelain and 2,000 porcelain fused to metal. Should Apollonia make or buy
the crowns? Explain the outcome.
Transcribed Image Text:A local dental laboratory has offered to supply Apollonia all the crowns it needs. Its price is $265 for all-porcelain crowns and $145 for porcelain-fused- to-metal crowns; however, the offer is conditional on supplying both types of crowns-it will not supply just one type for the price indicated. If the offer is accepted, the equipment used by Apollonia's laboratory would be scrapped (it is old and has no market value), and the lab facility would be closed. Apollonia uses 2,500 all-porcelain crowns and 1,000 porcelain-fused-to-metal crowns per year. Required: 1. Should Apollonia continue to make its own crowns, or should they be purchased from the external supplier? What is the dollar effect of purchasing? 2. What qualitative factors should Apollonia consider in making this decision? 3. Suppose that the lab facility is owned rather than rented and that the $22,000 is depreciation rather than rent. What effect does this have on the analysis in Requirement 1? 4. Refer to the original data. Assume that the volume of crowns is 5,000 all porcelain and 2,000 porcelain fused to metal. Should Apollonia make or buy the crowns? Explain the outcome.
Objective 2 - Define the concept of relevant costs and revenues.4 - Apply the
tactical decision-making concepts in a variety of business situations.
Apollonia Dental Services is part of an HMO that operates in a large
metropolitan area. Currently, Apollonia has its own dental laboratory to
produce two varieties of porcelain crowns-all porcelain and porcelain fused
to metal. The unit costs to produce the crowns are as follows:
cengage.com/static/nb/uvevolindex.html?elSBN=97813059707248id=187456249&nbld=524649&snapshotid=524649&dockAppUid=1. 7/13
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Porcelain Fused
All Porcelain
to Metal
Direct materials
S190
$ 80
Direct labor
50
20
Variable overhead
25
5
Fixed overhead
60
40
Total
S325
$145
Fixed overhead is detailed as follows:
Salary (supervisor)
Depreciation
Rent (lab facility)
$30,000
8,000
22,000
Overhead is applied on the basis of direct labor hours. The rates above were
computed using 8,000 direct labor hours. No significant non-unit-level
overhead costs are incurred.
Transcribed Image Text:Objective 2 - Define the concept of relevant costs and revenues.4 - Apply the tactical decision-making concepts in a variety of business situations. Apollonia Dental Services is part of an HMO that operates in a large metropolitan area. Currently, Apollonia has its own dental laboratory to produce two varieties of porcelain crowns-all porcelain and porcelain fused to metal. The unit costs to produce the crowns are as follows: cengage.com/static/nb/uvevolindex.html?elSBN=97813059707248id=187456249&nbld=524649&snapshotid=524649&dockAppUid=1. 7/13 Print Preview Porcelain Fused All Porcelain to Metal Direct materials S190 $ 80 Direct labor 50 20 Variable overhead 25 5 Fixed overhead 60 40 Total S325 $145 Fixed overhead is detailed as follows: Salary (supervisor) Depreciation Rent (lab facility) $30,000 8,000 22,000 Overhead is applied on the basis of direct labor hours. The rates above were computed using 8,000 direct labor hours. No significant non-unit-level overhead costs are incurred.
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