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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Make-or-buy decision
Watts Technologies Company has been purchasing carrying cases for its portable tablets at a delivered cost of $6.50 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 60% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:


If Watts Technologies Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factor)' overhead costs associated with the cases are expected to be 20% of the direct labor costs.

a.Prepare a differential analysis report for the make-or-buy decision.
b.On I he basis of the data presented, would it Ik- advisable to make the earning cases or to continue buying them? Explain.

To determine

Concept Introduction:

Decision making plays an important role in the management. The decisions taken by managers are called managerial decisions. Managerial Decisions are decisions taken by managers for the operations of a firm. These decisions include setting target growth rates, hiring or firing employees, and deciding what products to sell. Manager's decisions are taken on the basis of quantitative as well as the qualitative measures. The managerial decision includes the decisions like make or buy, accept or reject new offers, sell or further process etc. These decisions are taken on the basis of relevant costs.

Relevant costs are the costs that are relevant for any decision making. Relevant costs are helpful for take managerial decisions like make or buy, accept or reject new offers, sell or further process etc.

Two basic types of the relevant costs are as follows:

  1. Out-of-pocket costs
  2. Opportunity costs

Requirement-a:

To Prepare:

The differential analysis report for the proposed discontinuation

Explanation

The differential analysis report for the proposed discontinuation is prepared as follows:

    Loss of sales $ (3,750,000)
    Saving in Variable Cost of Goods Sold (2250000*80%)
To determine

Concept Introduction:

Decision making plays an important role in the management. The decisions taken by managers are called managerial decisions. Managerial Decisions are decisions taken by managers for the operations of a firm. These decisions include setting target growth rates, hiring or firing employees, and deciding what products to sell. Manager's decisions are taken on the basis of quantitative as well as the qualitative measures. The managerial decision includes the decisions like make or buy, accept or reject new offers, sell or further process etc. These decisions are taken on the basis of relevant costs.

Relevant costs are the costs that are relevant for any decision making. Relevant costs are helpful for take managerial decisions like make or buy, accept or reject new offers, sell or further process etc.

Two basic types of the relevant costs are as follows:

  1. Out-of-pocket costs
  2. Opportunity costs

Requirement-b:

To Indicate:

If the product should be retained

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