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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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Use the following information for Exercises 8-52 and 8-53:

Blasingham Company is currently manufacturing Part Q108, producing 35,000 units annually. The part is used in the production of several products made by Blasingham. The cost per unit for Q108 is as follows:

Chapter 8, Problem 52E, Use the following information for Exercises 8-52 and 8-53: Blasingham Company is currently

8-52 Make or Buy

Refer to the information for Blasingham Company above. Of the total fixed overhead assigned to Q108, $77,000 is direct fixed overhead (the lease of production machinery and salary of a production line supervisor—neither of which will be needed if the line is dropped). The remaining fixed overhead is common fixed overhead. An outside supplier has offered to sell the part to Blasingham for $11. There is no alternative use for the facilities currently used to produce the part.

Required:

  1. 1. CONCEPTUAL CONNECTION Should Blasingham Company make or buy Part Q108?
  2. 2. What is the most that Blasingham would be willing to pay an outside supplier?
  3. 3. If Blasingham buys the part, by how much will income increase or decrease?

1.

To determine

Explain whether Company B should produce Part Q108 or purchase it.

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.

The following table represents the more cost-effective alternative:

CostsAlternatives
Make ($)Buy ($)
Direct materials1210,000 
Direct labor270,000 
Variable overhead352,500 
Fixed overhead77,000 
Purchase cost4 385,000
Total relevant cost409,500385,000

Table (1)

If the company purchases the Part Q108 then it will cost $385,000 which is cheaper than the other alternative. Therefore, the company should purchase Part Q108. The direct fixed overhead can be avoided if the company purchases the part.

Working Notes:

1. Calculation of direct materials:

Direct materials=Number of units×Direct materials per unit=35,000units×$6=$210,000

Hence, the amount of direct materials is $210,000

2.

To determine

Calculate the maximum amount that Company B is willing to pay to the supplier for purchase.

3.

To determine

Calculate the amount of increase or decrease in income.

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