Morrill Company produces two different types of gauges: a density gauge and a thickness gauge. The segmented income statement for a typical quarter follows.DensityThicknessGaugeGaugeTotalSales$ 163,500$ 87,200$ 250,700Less variable expenses87,20050,140137,340Contribution margin2476.300$ 37,060$ 113,360Less direct fixed expenses*21,80041,42063,220Segment margin$ 54,500$ (4,360)$ 50,140Less common fixed expenses32,700Operating income$ 17,440* Includes depreciation.The density gauge uses a subassembly that is purchased from an external supplier for $25 per unit. Each quarter, 2,180 subassemblies are purchased. All units producedare sold, and there are no ending inventories of subassemblies. Morrill is considering making the subassembly rather than buying it. Unit-level variable manufacturingcosts are as follows:Direct materials$2Direct labor3Variahle overhead Direct labor3Variable overhead2No significant non-unit-level costs are incurred.Morrill is considering two alternatives to supply the productive capacity for the subassembly.1. Lease the needed space and equipment at a cost of $29,430 per quarter for the space and $10,900 per quarter for a supervisor. There are no other fixed expenses.2. Drop the thickness gauge. The equipment could be adapted with virtually no cost and the existing space utilized to produce the subassembly. The direct fixedexpenses, including supervision, would be $41,420, $8,720 of which is depreciation on equipment. If the thickness gauge is dropped, sales of the density gauge willnot be affected.Required:1. Should Morrill Company make or buy the subassembly?Make the subassemblyIf it makes the subassembly, which alternative should be chosen?Drop the thickness gaugeEnter the relevant costs of each alternative.Lease and MakeBuyDrop Thickness Gauge and MakeTotal relevant costs55,590 V54,50047,9602. Suppose that dropping the thickness gauge will decrease sales of the density gauge by 10 percent. What decision should now be made?

Buy cost is the cost to buy or purchase the product. Make cost is the cost of producing the product.

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 Thickness Gauge Gauge Total Sales $ 163,500 $ 87,200 $ 250,700 Less variable expenses 87,200 50,140 137,340 Contribution margin $ 76,300 $ 37,060 $ 113,360 Less direct fixed expenses* 21,800 41,420 63,220 Segment margin $ 54,500 $ (4,360) $ 50,140 Less common fixed expenses 32,700 Operating income $ 17,440 * Includes depreciation. The density gauge uses a subassembly that is purchased from an external supplier for $25 per unit. Each quarter, 2,180 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

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 Thickness Gauge Gauge Total Sales $ 163,500 $ 87,200 $ 250,700 Less variable expenses 87,200 50,140 137,340 Contribution margin $ 76,300 $ 37,060 $ 113,360 Less direct fixed expenses* 21,800 41,420 63,220 Segment margin $ 54,500 $ (4,360) $ 50,140 Less common fixed expenses 32,700 Operating income $ 17,440 * Includes depreciation. The density gauge uses a subassembly that is purchased from an external supplier for $25 per unit. Each quarter, 2,180 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

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter17: Activity Resource Usage Model And Tactical Decision Making

Section: Chapter Questions

Problem 31P: Morrill Company produces two different types of gauges: a density gauge and a thickness gauge. The...

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