Kramer Company, makes 3,000 units every year of a component called Axial Tap for use in one of its products. Data concerning the unit production costs of the axial tap for Kramer Company is given follow: Direct Material $33 Direct Labor $10 Variable Manufacturing Overhead $7 Fixed Manufacturing Overhead* $20 Total Manufacturing Cost per unit $70 * based on 3,000 units of production, all of it is Traceable Fixed Cost. Hubbert Company, also produces Axial Taps. Hubbert wants to supply all Axial taps to Kramer Company. Hubbert is considering to offer selling price of $66/unit to Kramer. If Hubbert supplies the taps, Kramer Company can discontinue making the Axial Taps, as a result 40% of the above fixed manufacturing overhead cost could be saved. Assume that direct labor is a variable cost. Moreover, Kramer Company could use the facilities presently devoted to production of the Axial Taps to expand production of another product that would increase contribution margin of the other product by $35,000 annually. Hubbert Company’s normal Contribution Margin for Axial Taps is $18/unit. However, expected Contribution Margin from selling to Kramer is $11/unit. Hubert Company still wants to sell to Kramer for long term strategic purposes. Hubbert will lose 2,000 units of sales to other customers for fulfilling the requirements of Kramer Company because of capacity. This proposal is not finalized yet and Kramer and Hubber are reviewing this proposal separately. From Kramer's perspective, identify the relevant costs for making the make or buy decision about Hubbert's offer. A. Hubbert's selling price B. Hubbert's lost sales C. Direct Labor D. Kramer's contribution margin E. Variable Manufacturing Overhead F. Kramer's selling price G. Direct Material H. Hubbert's contribution margin I. Fixed Manufacturing Overhead
Part-1 of 3
Kramer Company, makes 3,000 units every year of a component called Axial Tap for use in one of its products. Data concerning the unit production costs of the axial tap for Kramer Company is given follow:
Direct Material
$33
Direct Labor
$10
Variable Manufacturing Overhead
$7
Fixed Manufacturing Overhead*
$20
Total
$70
* based on 3,000 units of production, all of it is Traceable Fixed Cost.
Hubbert Company, also produces Axial Taps. Hubbert wants to supply all Axial taps to Kramer Company. Hubbert is considering to offer selling price of $66/unit to Kramer. If Hubbert supplies the taps, Kramer Company can discontinue making the Axial Taps, as a result 40% of the above fixed manufacturing overhead cost could be saved. Assume that direct labor is a variable cost. Moreover, Kramer Company could use the facilities presently devoted to production of the Axial Taps to expand production of another product that would increase contribution margin of the other product by $35,000 annually.
Hubbert Company’s normal Contribution Margin for Axial Taps is $18/unit. However, expected Contribution Margin from selling to Kramer is $11/unit. Hubert Company still wants to sell to Kramer for long term strategic purposes. Hubbert will lose 2,000 units of sales to other customers for fulfilling the requirements of Kramer Company because of capacity.
This proposal is not finalized yet and Kramer and Hubber are reviewing this proposal separately.
From Kramer's perspective, identify the relevant costs for making the make or buy decision about Hubbert's offer.
A.
Hubbert's selling price
B.
Hubbert's lost sales
C.
Direct Labor
D.
Kramer's contribution margin
E.
Variable Manufacturing Overhead
F.
Kramer's selling price
G.
Direct Material
H.
Hubbert's contribution margin
I.
Fixed Manufacturing Overhead
QUESTION 5
Part-2 of 3
Answer the following questions from Kramer Company's perspective. (All answer should be numeric, number format: no comma, two decimal places 1234.56, NO $ sign before)
Differential Cost per Unit to make Axial Taps
50
Differential Cost per Unit to buy Axial Taps
Fixed Manufacturing Overhead Cost per unit that is not relevant to the make or buy decision
Opportunity Cost involved in the decision
QUESTION 6
Part-3 of 3
Based on Make or Buy analysis, Kramer Company should
the offer from Hubbert.
The analysis shows that Kramer Company's net income will
by
if the decision is to accept the offer.
QUESTION 7
Special Order - Hubbert Perspective
Based on information provided for the previous questions on Kramer and Hubbert, please input the correct answers. Hubbert is considering the proposal to Kramer as special order and does not expect any change in costs.
Hubbert company's normal selling price of Axial Tap is
per unit.
Hubbert company's variable cost for Axial Tap is
per unit.
Hubbert company's total forgone contribution margin from the lost sales, if the special order is proposed and accepted for $66 per unit, by Kramer is
.
Hubbert company's total incremental contribution margin if the special order is proposed and accepted for $66 per unit by Kramer is
.
(All answer should be numeric, number format: no comma, two decimal places 1234.56, NO $ sign before)
QUESTION 8
Should Hubbert make the proposal to sell the axial taps for $66 per unit?
A.
No
B.
Yes
QUESTION 9
If Hubbert proposes to sell the axial taps for $66 per unit, Hubbert's operating income will
by
.
If Hubbert proposes to sell the axial taps for
per unit, Hubbert's operating income will
by
.
If Hubbert proposes to sell the axial taps for
per unit, Hubbert's operating income remain unchanged.
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