Hawkins Audio Video, Inc. manufactures digital cameras. Hawkins is considering whether it should outsource production of a part used in the manufacturing of its cameras. 60,000 units of the part were made by Hawkins last year. At this production level, the company incurred the following direct product costs: Direct Materials $250,000 Direct Labor $104,000 Manufacturing Overhead incurred during the same period for production of the part is represented by the following cost behavior equation: y = $0.10x + $50,000. If the part were purchased from an outside supplier, 80% of the total fixed manufacturing overhead cost would continue, and the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional income from this other product would be $12,600 per year. A supplier has been identified who can sell the part to Hawkins at a price of $7.80 per unit. Which of the following statements is incorrect assuming 50,000 units of the part will be needed next year? A. The total cost to make the part next year is $322,600. B. At a purchase price of $7.80, the cost to make is less than the cost to buy. C. If production is outsourced, operating income will decrease by $67,400. D. Qualitative considerations, such as whether the purchased part is of equal quality to its manufactured part, should be considered by Hawkins. E. At a purchase price of $6.45 (rounded), Hawkins would be indifferent between making and buying the part.

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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Hawkins Audio Video, Inc. manufactures digital cameras. Hawkins is considering whether it should outsource production of a part used in the manufacturing of its cameras. 60,000 units of the part were made by Hawkins last year. At this production level, the company incurred the following direct product costs:

Direct Materials	$250,000
Direct Labor	$104,000

Manufacturing Overhead incurred during the same period for production of the part is represented by the following cost behavior equation: y = $0.10x + $50,000.

If the part were purchased from an outside supplier, 80% of the total fixed manufacturing overhead cost would continue, and the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional income from this other product would be $12,600 per year.

A supplier has been identified who can sell the part to Hawkins at a price of $7.80 per unit. Which of the following statements is incorrect assuming 50,000 units of the part will be needed next year?

The total cost to make the part next year is $322,600.

At a purchase price of $7.80, the cost to make is less than the cost to buy.

If production is outsourced, operating income will decrease by $67,400.

Qualitative considerations, such as whether the purchased part is of equal quality to its manufactured part, should be considered by Hawkins.

At a purchase price of $6.45 (rounded), Hawkins would be indifferent between making and buying the part.

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