Make or BuyDesert Industries manufactures 5,000 units of Part X300 each month for use in production. The facilities now being used toproduce Part X300 have fixed monthly overhead costs of $75,000, and a theoretical capacity to produce 7,000 units per month.If Desert were to buy Part X300 from an outside supplier, the facilities would be idle and 80% of the fixed costs would continueto be incurred. There are no alternative uses for the production facilities. The variable production costs of Part X300 are $34 perunit. Fixed overhead is allocated based on planned production levels.If Desert Industries continues to use 5,000 units of Part X300 each month, it would realize a net benefit by purchasing Part X300from an outside supplier only if the supplier's unit price is less than what amount?$0Check

Make or buy decision:This type of decision is generally considered when a component can be bought or…

Answered: Make or Buy Desert Industries…

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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Futura Company purchases the 68.000 starters that it installs in its standard line of farm tractors from a supplier for the price of $11.00 per unit. Due to a reduction in output, the company now has idle capacity that could be used to produce the starters rather than buying them from an outside supplier. However, the company's chief engineer is opposed to making the starters because the production cost per unit is $11.60 as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $5.00 2.80 1.70 1.00 0.20 0.40 $11.60 Total $ 115,600 $ 68,000 $ 27,200 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $115,600) to oversee production. However, the company has sufficient idle tools and machinery such that no new equipment would have to be purchased. The rent charge above is based on space utilized in the plant. The total rent on the plant is $84,000 per period.…
Futura Company purchases the 71,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $12.70 per unit. Due to a reduction in output, the company now has idle capacity that could be used to produce the starters rather than buying them from an outside supplier. However, the company's chief engineer is opposed to making the starters because the production cost per unit is $12.90 as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ 6.00 3.00 1.50 1.30 0.70 0.40 $ 12.90 Total If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $106,500) to oversee production. However, the company has sufficient idle tools and machinery such that no new equipment would have to be purchased. The rent charge above is based on space utilized in the plant. The total rent on the plant is $84,000 per period. Depreciation is due to obsolescence…
Lightning Semiconductors produces 100,000 hi – tech computer chips per month. Each chip uses a component that Lightning makes in - house. The variable costs to make the component are $1.40 per unit, and the fixed costs are $1,300,000 per month. The company has been approached by a foreign producer who can supply the component, within acceptable quality standards, for $1.20 each. The fixed costs are unavoidable, and Lightning would have no other use for the facilities currently employed in making the component. What would be the effect on operating income if the company decides to outsource? O A. Lightning Semiconductors could save $1,300,000 per month in costs. B. There would be no effect on operating income. O c. Lightning Semiconductor's costs would increase by $120,000 per month. O D. Lightning Semiconductors could save $20,000 per month in costs.
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A rotational molding operation has fixed costs of $10,000 per year and variable costs of $52 per unit. If the process is automated via conveyor, its fixed cost will be $43,000 per year, but its variable cost will be only $10 per unit. Determine the number of units each year necessary for the two operations to break even. The number of units each year necessary for the two operations to break even, (in units) Round to the nearest two (2) decimal places
Middle Industries produces a sensor for use in manufacturing. It produces the sensor in a plant with an annual practical capacity of 75,000 units. The variable cost of the sensor is $185.00 per unit, and the fixed costs of the plant are $12,375,000 annually. Current annual demand is 55,000 sensors. Middle Industries bought the plant because it was close to its other manufacturing facilities and was available for sale when they were searching for a location. Required: What cost per sensor should the cost system report to facilitate management decision making? What is the cost of excess capacity? What cost per sensor would the cost system report if the smallest manufacturing plant that could be built was able to produce 75,000 sensors? What would be the cost of excess capacity?
A machine part is manufactured at a unit cost of 40¢ for material and 15¢ for direct labor. An investment of $500,000 in tooling is required. The order calls for 3 million pieces. Halfway through the order, managers learn that a new method of manufacture can be put into effect that will reduce the unit costs to 34¢ for material and 10¢ for direct labor—but it will require $100,000 for additional tooling. This tooling will not be useful for future orders. Other costs are allocated at 2.5 times the direct labor cost. What, if anything, should be done?
AMD is contemplating a decision to either continue producing a unique line of microprocessors, or discontinue production. • The AMD factory manufactures approximately 100,000 of such processors and generates $3,000,000 in revenues and incurs $2,000,000 in variable costs. • AMD estimates that if the product is discontinued ADM would save $ 1,500,000 in fixed manufacturing costs in engineering support and depreciation costs of production equipment. • Should AMD keep or discontinue production of this product line?
Cairney, Incorporated manufactures a specialized part used in internal combustion engines. The annual demand for the part is 261,000 units. The facility has a practical capacity of 276,000 units annually. The company leased the current facility because facilities capable of manufacturing the unit require machines that can produce 69,000 units each. The annual cost of the facility is $1,092,960. The variable cost of a part is $4. Required: a. What cost per unit should the cost system report to facilitate management decision making? Note: Round your answer to 2 decimal places. b. What is the cost of excess capacity? a. Cost per unit b. Cost of excess capacity $ $ 8.19 122,850
Futura Company purchases the 40,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $8.40 per unit. Due to a reduction in output, the company now has idle capacity that could be used to produce the starters rather than buying them from an outside supplier. However, the company's chief engineer is opposed to making the starters because the production cost per unit is $9.20 as shown below: Direct materials Direct labor Supervision Depreciation Variable manufacturing overhead Rent Total product cost Per Unit $ 3.10 2.70 1.50 1.00 0.60 0.30 $9.20 Total $ 60,000 $ 40,000 $ 12,000 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $60,000) to oversee production. However, the company has sufficient idle tools and machinery such that no new equipment would have to be purchased. The rent charge above is based on space utilized in the plant. The total rent on the plant is $80,000 per period. Depreciation is…
Melbourne Corporation has traditionally made a subcomponent of its major product. Annual production of 30,000 subcomponents results in the following costs: Direct materials $ 250,000 Direct labor $ 200,000 Variable manufacturing overhead $ 190,000 Fixed manufacturing overhead $ 120,000 Melbourne has received an offer from an outside supplier who is willing to provide the 30,000 units of the subcomponent each year at a price of $28 per unit. There would be no effect of this decision on the total fixed manufacturing overhead of the company. Melbourne knows that the facilities now being used to manufacture the subcomponent could be rented to another company for revenue of $80,000 per year if the subcomponent were purchased from the outside supplier. The financial advantage (disadvantage) of making the subcomponent would be: Multiple Choice $0 $280,000 $120,000 $200,000
Gunston Processing produces two products, ALT-1 and ALT-2, from a batch using a single raw material, ALT-O. Both products require further processing before they be can be sold. A batch of ALT-1 can be sold for $150,000 after processing costs of $30,000. A batch of ALT-2 can be sold for $240,000 after further processing. The cost of ALT-0 is $200,000 for a batch. Using the estimated net realizable value method, a joint cost of $120,000 was allocated to ALT-2 for a batch. Required: Compute the separable processing cost for a batch of ALT-2. Processing cost hs

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