Make-or-Buy, Traditional Analysis Morrill Company produces two different types of gauges: a density gauge and a thickness gauge. The segmented income statement for a typical quarter follows. Density Gauge Thickness Gauge Total Sales $ 207,000 $ 110,400 $ 317,400 Less variable expenses 110,400 63,480 173,880 Contribution margin $ 96,600 $ 46,920 $ 143,520 Less direct fixed expenses* 27,600 52,440 80,040 Segment margin $ 69,000 $ (5,520) $ 63,480 Less common fixed expenses 41,400 Operating income $ 22,080 * Includes depreciation. The density gauge uses a subassembly that is purchased from an external supplier for $25 per unit. Each quarter, 2,760 subassemblies are purchased. All units produced are sold, and there are no ending inventories of subassemblies. Morrill is considering making the subassembly rather than buying it. Unit-level variable manufacturing costs are as follows: Direct materials $2 Direct labor 3 Variable overhead 2 No significant non-unit-level costs are incurred. Morrill is considering two alternatives to supply the productive capacity for the subassembly. Lease the needed space and equipment at a cost of $37,260 per quarter for the space and $13,800 per quarter for a supervisor. There are no other fixed expenses. Drop the thickness gauge. The equipment could be adapted with virtually no cost and the existing space utilized to produce the subassembly. The direct fixed expenses, including supervision, would be $52,440, $11,040 of which is depreciation on equipment. If the thickness gauge is dropped, sales of the density gauge will not be affected. Required: 1. Should Morrill Company make or buy the subassembly? If it makes the subassembly, which alternative should be chosen? Enter the relevant costs of each alternative. Lease and Make Buy Drop Thickness Gauge and Make Total relevant costs $fill in the blank 3 $fill in the blank 4 $fill in the blank 5 2. Suppose that dropping the thickness gauge will decrease sales of the density gauge by 10 percent. What decision should now be made? 3. Assume that dropping the thickness gauge decreases sales of the density gauge by 10 percent and that 3,864 subassemblies are required per quarter. As before, assume that there are no ending inventories of subassemblies and that all units produced are sold. Assume also that the per-unit sales price and variable costs are the same as in Requirement 1. Include the leasing alternative in your consideration. Now, what is the correct decision?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Make-or-Buy, Traditional Analysis
Morrill Company produces two different types of gauges: a density gauge and a thickness gauge. The segmented income statement for a typical quarter follows.
| Density Gauge |
Thickness Gauge |
Total |
||||
| Sales | $ | 207,000 | $ | 110,400 | $ | 317,400 |
| Less variable expenses | 110,400 | 63,480 | 173,880 | |||
| Contribution margin | $ | 96,600 | $ | 46,920 | $ | 143,520 |
| Less direct fixed expenses* | 27,600 | 52,440 | 80,040 | |||
| Segment margin | $ | 69,000 | $ | (5,520) | $ | 63,480 |
| Less common fixed expenses | 41,400 | |||||
| Operating income | $ | 22,080 | ||||
| * Includes |
The density gauge uses a subassembly that is purchased from an external supplier for $25 per unit. Each quarter, 2,760 subassemblies are purchased. All units produced are sold, and there are no ending inventories of subassemblies. Morrill is considering making the subassembly rather than buying it. Unit-level variable
| Direct materials | $2 |
| Direct labor | 3 |
| Variable overhead | 2 |
No significant non-unit-level costs are incurred.
Morrill is considering two alternatives to supply the productive capacity for the subassembly.
- Lease the needed space and equipment at a cost of $37,260 per quarter for the space and $13,800 per quarter for a supervisor. There are no other fixed expenses.
- Drop the thickness gauge. The equipment could be adapted with virtually no cost and the existing space utilized to produce the subassembly. The direct fixed expenses, including supervision, would be $52,440, $11,040 of which is depreciation on equipment. If the thickness gauge is dropped, sales of the density gauge will not be affected.
Required:
1. Should Morrill Company make or buy the subassembly?
If it makes the subassembly, which alternative should be chosen?
Enter the relevant costs of each alternative.
| Lease and Make | Buy | Drop Thickness Gauge and Make | |
| Total relevant costs | $fill in the blank 3 | $fill in the blank 4 | $fill in the blank 5 |
2. Suppose that dropping the thickness gauge will decrease sales of the density gauge by 10 percent. What decision should now be made?
3. Assume that dropping the thickness gauge decreases sales of the density gauge by 10 percent and that 3,864 subassemblies are required per quarter. As before, assume that there are no ending inventories of subassemblies and that all units produced are sold. Assume also that the per-unit sales price and variable costs are the same as in Requirement 1. Include the leasing alternative in your consideration. Now, what is the correct decision?
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