Problem 2 (Make or Buy a Component) Diamond Inc., manufactures a variety of heating and air-conditioning units. The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a thermostat to Diamond for P200 per unit. To evaluate this offer, Diamond Inc., has gathered the following information relating to its own cost of producing the thermostat internally. Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, common, but allocated Total cost 40% supenvisory salaries; 60% depreciation of special equipment (no resale value) Per unit P 60 80 10 50 100 P 300 15,000 units per year 900,000 1,200.000 150,000 750,000 1.500.000 P 4, 500,000 Required 1. Assuming that the company has no alternative use for the facilities now being used to produce the thermostat, should the outside supplier's offer be accepted? Show all computations. 2. Suppose that if the thermostats were purchased, Diamond Inc., could use the freed capacity to launch a new product. The segment margin of the new product would be P650,000 per year. Should Diamond Inc., accept the offer to buy the thermostats from the outside supplier for P200 each? Show computations.
Problem 2 (Make or Buy a Component) Diamond Inc., manufactures a variety of heating and air-conditioning units. The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a thermostat to Diamond for P200 per unit. To evaluate this offer, Diamond Inc., has gathered the following information relating to its own cost of producing the thermostat internally. Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, common, but allocated Total cost 40% supenvisory salaries; 60% depreciation of special equipment (no resale value) Per unit P 60 80 10 50 100 P 300 15,000 units per year 900,000 1,200.000 150,000 750,000 1.500.000 P 4, 500,000 Required 1. Assuming that the company has no alternative use for the facilities now being used to produce the thermostat, should the outside supplier's offer be accepted? Show all computations. 2. Suppose that if the thermostats were purchased, Diamond Inc., could use the freed capacity to launch a new product. The segment margin of the new product would be P650,000 per year. Should Diamond Inc., accept the offer to buy the thermostats from the outside supplier for P200 each? Show computations.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:What should be done?
Problem 2 (Make or Buy a Component)
Diamond Inc., manufactures a variety of heating and air-conditioning units. The company is currently
manufacturing all of its own component parts. An outside supplier has offered to sell a thermostat to
Diamond for P200 per unit. To evaluate this offer, Diamond lInc., has gathered the following information
relating to its own cost of producing the thermostat internally.
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead, traceable
Fixed manufacturing overhead, common, but allocated
Total cost
40% supervisory salaries; 60% depreciation of special equipment (no resale value)
Per unit
P 60
80
10
50
15,000 units per year
P. 900,000
1,200,000
150,000
750,000
1.500.000
P 4, 500,000
100
P 300
Required:
1. Assuming that the company has no alternative use for the facilities now being used to produce the
thermostat, should the outside supplier's offer be accepted? Show all computations.
2. Suppose that if the thermostats were purchased, Diamond Inc., could use the freed capacity to
launch a new product. The segment margin of the new product would be P650,000 per year. Should
Diamond Inc., accept the offer to buy the thermostats from the outside supplier for P200 each?
Show computations.
Problem 3 (Sell or Process Further)
Patrick Company manufactures three products from a common input in a joint processing operation. Joint
processing costs up to the split-off point total P100,000 per year. Joint processing costs up to the split-off
point total P100,000 per year. The company allocates these costs to the joint products on the basis of
their total sales value at split-off point. These sales values are as follows: Product A, P50,000; Product B,
P90,000; and Product C, P60,000.
Each product may be sold at the split-off point or processed further. Additional processing requires no
special facilities. The additional processing costs and the sales value after further processing for each
product (on an annual basis) are shown below:
Additional
Processing
Costs
Sales
Value
Product
P 35,000 P 80,000
40,000 150,000
12,000 75,000
B.
Required:
Which product or products should be sol at the split-off point, and which product or products should be
processed further? Show computations.
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