Townsend Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Townsend produces a relatively small amount (15,000 units) of the cream and is considering the purchase of the product from an outside supplier for $9 each. If Townsend purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Townsend's accountant constructed the following profitability analysis. $300,000 (37,500) (27,000) (10,500) |(15,000) 210,000 (75,000) (45,000) (50,000) Revenue (15,000 units x $20) Unit-level materials costs (15,000 units x $2.50) Unit-level labor costs (15,000 units × $1.80) Unit-level overhead costs (15, 000 x $0.70) Unit-level selling expenses (15,000 × $1.00) Contribution margin Skin cream production supervisor's salary Allocated portion of facility-level costs Product-level advertising cost Contribution to company-wide income $ 40,000 Required a. Identify the cost items relevant to the make-or-outsource decision. b. What is the avoidable cost per unit if the outsourcing decision is taken? Should Townsend continue to make the product or buy it from the supplier? c. Suppose that Townsend is able to increase sales by 10,000 units (sales will increase to 25,000 units). Calculate the total avoidable costs. At this level of production, should Townsend make or buy the cream?

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter11: Differential Analysis And Product Pricing

Section: Chapter Questions

Problem 2CMA

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Transcribed Image Text:Townsend Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Townsend produces a relatively small amount (15,000 units) of the cream and is considering the purchase of the product from an outside supplier for $9 each. If Townsend purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Townsend's accountant constructed the following profitability analysis. Revenue (15,000 units x $20) Unit-level materials costs (15,000 units x $2.50) Unit-level labor costs (15,000 units x $1.80) Unit-level overhead costs (15,000 × $0.70) Unit-level selling expenses (15,000 × $1.00) Contribution margin Skin cream production supervisor's salary Allocated portion of facility-level costs Product-level advertising cost $300,000 (37,500) (27,000) (10,500) (15,000) 210,000 ( 75,000) ( 45,000) (50,000) $ 40,000 Contribution to company-wide income Required a. Identify the cost items relevant to the make-or-outsource decision. b. What is the avoidable cost per unit if the outsourcing decision is taken? Should Townsend continue to make the product or buy it from the supplier? c. Suppose that Townsend is able to increase sales by 10,000 units (sales will increase to 25,000 units). Calculate the total avoidable costs. At this level of production, should Townsend make or buy the cream? Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Required A Required B Required C Suppose that Townsend is able to increase sales by 10,000 units (sales will increase to 25,000 units). Calculate the total avoidable costs. At this level of production, should Townsend make or buy the cream? Total avoidable costs 1 X At this level of production, should Townsend make or buy the cream? Make < Required B Required C >

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