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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Structuring a Make-or-Buy Problem

Coed Scents, a national producer of young adult perfumes and colognes, needs to determine if it would be cheaper to produce 100,000 bottles of its most popular perfume, Two AM, for sale in its college town shops or to purchase them from an outside supplier for $25 each. Cost information on internal production includes the following:

Chapter 8, Problem 26BEB, Structuring a Make-or-Buy Problem Coed Scents, a national producer of young adult perfumes and

Fixed overhead will continue whether the ingredient is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price.

Required:

  1. 1. What are the alternatives for Coed Scents?
  2. 2. List the relevant cost(s) of internal production and of external purchase.
  3. 3. Which alternative is more cost effective and by how much?
  4. 4. Now assume that Coed Scents’ internal audit team learned through a special data analytics project that intellectual property theft is a significant threat for outsourced production. The team estimates that if Coed Scents outsources its production, it will need to spend $350,000 to manage intellectual property theft of its Two AM brand by competitors operating in the country where the outsourced production occurs. Which alternative is more cost effective and by how much?

1.

To determine

Describe the alternatives for Company C.

Explanation

Make-or-Buy Decisions:

The common problem for the managers is to make a decision about whether to purchase a product from the supplier or to produce a specific product. The decisions which involve the choice between external production and internal production are known as make-or-buy decisions...

2.

To determine

List the relevant costs of internal production and external purchase.

3.

To determine

Evaluate which alternative is more cost-effective and its amount.

4.

To determine

Evaluate which alternative is more cost effective if the company needs to spend $350,000 to manage the intellectual property.

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