Marvel Dental Services is part of an HMO that operates in a large metropolitan area. Currently, Marvel 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: All Porcelain Porcelain fused to metal $ 190 $ 80 20 Direct materials Direct labor 50 Variable overhead 25 5 Fixed overhead 60 $107 40 $137 Total 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. A local dental laboratory has offered to supply Marvel all the crowns it needs. Its price is $265 for all- porcelain crowns and $142 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 Gray's laboratory would be scrapped (it is old and has no market value), and the lab facility would be closed. Marvel uses 2,500 all porcelain crowns and 1,000 porcelain fused to metal crowns per year.
Marvel Dental Services is part of an HMO that operates in a large metropolitan area. Currently, Marvel 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: All Porcelain Porcelain fused to metal $ 190 $ 80 20 Direct materials Direct labor 50 Variable overhead 25 5 Fixed overhead 60 $107 40 $137 Total 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. A local dental laboratory has offered to supply Marvel all the crowns it needs. Its price is $265 for all- porcelain crowns and $142 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 Gray's laboratory would be scrapped (it is old and has no market value), and the lab facility would be closed. Marvel uses 2,500 all porcelain crowns and 1,000 porcelain fused to metal crowns per year.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Marvel Dental Services is part of an HMO that operates in a large metropolitan
area. Currently, Marvel 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:
All Porcelain
Porcelain fused to metal
$ 190
$ 80
20
Direct materials
Direct labor
50
Variable overhead
25
Fixed overhead
60
$107
40
$137
Total
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.
A local dental laboratory has offered to supply Marvel all the crowns it needs. Its
price is $265 for all- porcelain crowns and $142 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 Gray's laboratory would be scrapped (it is old and has no
market value), and the lab facility would be closed. Marvel uses 2,500 ll
porcelain crowns and 1,000 porcelain fused to metal crowns per year.
Required:
a. Should Marvel continue to make its own crowns, or should they be purchased
from the external supplier? What is the dollar effect of purchasing?
b. What qualitative factors should Marvel consider in making this decision?
c. 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 A?
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