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University of the People *

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3304

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Economics

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Apr 3, 2024

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pdf

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a. The preparation of the required differential analysis is as follows- Particulars Alternative-1 (Making it internally) (A) Alternative-2 (Buying outside) (B) Differential amount (C=A-B) Alternative-1 is Variable costs- Cost of outsourcing production (1) $0 $675,000 (15,000x45) -$675,000 Lower Direct material (2) $120,000 $0 $120,000 Higher Direct labor (3) $150,000 $0 $150,000 Higher Manufacturing overhead (4) $165,000 $0 $165,000 Higher Fixed costs (5) $390,000 $78,000 $312,000 Higher Total production costs (6=1+2+3+4+5+6) $825,000 $753,000 ($825,000 x 20%) $72,000 Higher b. Alternative-2 is the best. Considering that alternative-2's production costs ($753,000) are less than alternative-1's ($825,000) manufacturing costs, it is advised that alternative-2 be chosen (outsourcing production). Therefore, alternative-2 is the best option (outsourcing production). c. Summarize the result of outsourcing production using the format presented in Figure 7.3. Outsourcing production of quality glass analysis Variable production costs Cost increase to purchase externally (45*15000) ($ 675,000) Direct labor 150,000 Manufacturing overhead cost saving 165,000 Direct materials $120,000 Fixed production costs $312,000 & Cost Increase from outsourcing $72,000
References Klingensmith, J. Z. (2019, August 26). Costs and production . Pressbooks. https://psu.pb.unizin.org/introductiontomicroeconomics/chapter/chapter-6-costs-and-prod uction/
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