Mitus Company needs 20,000 special buckles for a backpack that it designs and manufactures. If the company buys the buckles from a buckle company, it will have idle capacity in its plant that cannot otherwise be used. The company factory space is sufficient to make the buckle if that is the logical choice. Indirect fixed manufacturing overhead is 80% of fixed overhead and will be incurred whether the buckles are purchased or manufactured by the company. The relevant costs of making and buying the buckles are as follows: Cost to make the buckles: Direct materials $ 3 Direct labor 4 Variable manufacturing overhead 2 Fixed manufacturing overhead (direct and indirect) 5 $14 Cost to buy from a buckle company $11 Make Purchase Variable Costs Direct Fixed Costs Purchase Price Total Costs Savings per unit Units Total Savings 20000

Mitus Company needs 20,000 special buckles for a backpack that it designs and manufactures. If the company buys the buckles from a buckle company, it will have idle capacity in its plant that cannot otherwise be used. The company factory space is sufficient to make the buckle if that is the logical choice. Indirect fixed manufacturing overhead is 80% of fixed overhead and will be incurred whether the buckles are purchased or manufactured by the company. The relevant costs of making and buying the buckles are as follows: Cost to make the buckles: Direct materials $ 3 Direct labor 4 Variable manufacturing overhead 2 Fixed manufacturing overhead (direct and indirect) 5 $14 Cost to buy from a buckle company $11 Make Purchase Variable Costs Direct Fixed Costs Purchase Price Total Costs Savings per unit Units Total Savings 20000

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter10: Short-term Decision Making

Section: Chapter Questions

Problem 7EB: Oat Treats manufactures various types of cereal bars featuring oats. Simmons Cereal Company has...

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Rolertyme Company manufactures roller skates. With the exception of the rollers, all parts of the skates are produced internally. Neeta Booth, president of Rolertyme, has decided to make the rollers instead of buying them from external suppliers. The company needs 100,000 sets per year (currently it pays 1.90 per set of rollers). The rollers can be produced using an available area within the plant. However, equipment for production of the rollers would need to be leased (30,000 per year lease payment). Additionally, it would cost 0.50 per machine hour for power, oil, and other operating expenses. The equipment will provide 60,000 machine hours per year. Direct material costs will average 0.75 per set, and direct labor will average 0.25 per set. Since only one type of roller would be produced, no additional demands would be made on the setup activity. Other overhead activities (besides machining and setups), however, would be affected. The companys cost management system provides the following information about the current status of the overhead activities that would be affected. (The supply and demand figures do not include the effect of roller production on these activities.) The lumpy quantity indicates how much capacity must be purchased should any expansion of activity supply be needed. The purchase price is the cost of acquiring the capacity represented by the lumpy quantity. This price also represents the cost of current spending on existing activity supply (for each block of activity). Production of rollers would place the following demands on the overhead activities: Producing the rollers also means that the purchase of outside rollers will cease. Thus, purchase orders associated with the outside acquisition of rollers will drop by 5,000. Similarly, the moves for the handling of incoming orders will decrease by 200. The company has not inspected the rollers purchased from outside suppliers. Required: 1. Classify all resources associated with the production of rollers as flexible resources and committed resources. Label each committed resource as a short- or long-term commitment. How should we describe the cost behavior of these short- and long-term resource commitments? Explain. 2. Calculate the total annual resource spending (for all activities except for setups) that the company will incur after production of the rollers begins. Break this cost into fixed and variable activity costs. In calculating these figures, assume that the company will spend no more than necessary. What is the effect on resource spending caused by production of the rollers? 3. Refer to Requirement 2. For each activity, break down the cost of activity supplied into the cost of activity output and the cost of unused activity.
Oat Treats manufactures various types of cereal bars featuring oats. Simmons Cereal Company has approached Oat Treats with a proposal to sell the company its top selling oat cereal bar at a price of $27,500 for 20,000 bars. The costs shown are associated with production of 20,000 oat bars currently. The manufacturing overhead consists of $3,000 of variable costs with the balance being allocated to fixed costs. Should Oat Treats make or buy the oat bars?
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