Make-or-Buy, Traditional Analysis Enter the relevant costs of each alternative.BuyDrop Thickness Gauge and MakeLease and MakeXTotal relevant costs.XX2. Suppose that dropping the thickness gauge will decrease sales of the density gauge by 10 percent. What decision should now be made?Keep the thickness gauge and buy the subassembly✓3. Assume that dropping the thickness gauge decreases sales of the density gauge by 10 percent and that 4,144 subassemblies are required per quarter. As before, assume that there are no ending inventories of subassemblies and that all unitsproduced are sold. Assume also that the per-unit sales price and variable costs are the same as in Requirement 1. Include the leasing alternative in your consideration. Now, what is the correct decision?Lease the space and make the subassembly✓ Make-or-Buy, Traditional AnalysisMorrill Company produces two different types of gauges: a density gauge and a thickness gauge. The segmented income statement for a typical quarter follows.DensityGaugeThicknessGaugeTotalSales$ 222,000$ 118,400 $ 340,400Less variable expenses118,40068,080186,480Contribution margin$ 103,600$ 50,320$ 153,920Less direct fixed expenses*29,60056,24085,840Segment margin$ 74,000 $ (5,920)$ 68,08044,400Less common fixed expensesOperating income$ 23,680* Includes depreciation.The density gauge uses a subassembly that is purchased from an external supplier for $25 per unit. Each quarter, 2,960 subassemblies are purchased. All units produced are sold, and there are no ending inventories of subassemblies. Morrill isconsidering making the subassembly rather than buying it. Unit-level variable manufacturing costs are as follows:Direct materials$2Direct labor3Variable overhead2No significant non-unit-level costs are incurred.Morrill is considering two alternatives to supply the productive capacity for the subassembly.1. Lease the needed space and equipment at a cost of $39,960 per quarter for the space and $14,800 per quarter for a supervisor. There are no other fixed expenses.2. Drop the thickness gauge. The equipment could be adapted with virtually no cost and the existing space utilized to produce the subassembly. The direct fixed expenses, including supervision, would be $56,240, $11,840 of which isdepreciation on equipment. If the thickness gauge is dropped, sales of the density gauge will not be affected.Required:1. Should Morrill Company make or buy the subassembly?Make the subassembly✓If it makes the subassembly, which alternative should be chosen?Drop the thickness gauge ✓

Make cost is the cost to product the product internally. Buy cost is the cost to purchase the…

Enter the relevant costs of each alternative. Buy Drop Thickness Gauge and Make Lease and Make X Total relevant costs X X 2. Suppose that dropping the thickness gauge will decrease sales of the density gauge by 10 percent. What decision should now be made? Keep the thickness gauge and buy the subassembly ✓ 3. Assume that dropping the thickness gauge decreases sales of the density gauge by 10 percent and that 4,144 subassemblies are required per quarter. As before, assume that there are no ending inventories of subassemblies and that all units produced are sold. Assume also that the per-unit sales price and variable costs are the same in Requirement 1. Include the leasing alternative in your consideration. Now, what is the correct decision? Lease the space and make the subassembly ✓

Enter the relevant costs of each alternative. Buy Drop Thickness Gauge and Make Lease and Make X Total relevant costs X X 2. Suppose that dropping the thickness gauge will decrease sales of the density gauge by 10 percent. What decision should now be made? Keep the thickness gauge and buy the subassembly ✓ 3. Assume that dropping the thickness gauge decreases sales of the density gauge by 10 percent and that 4,144 subassemblies are required per quarter. As before, assume that there are no ending inventories of subassemblies and that all units produced are sold. Assume also that the per-unit sales price and variable costs are the same in Requirement 1. Include the leasing alternative in your consideration. Now, what is the correct decision? Lease the space and make the subassembly ✓

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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