Department A Department B Department C Total Sales $300,000 $280,000 $120,000 $7
ID: 2388501 • Letter: D
Question
Department A Department B Department C TotalSales $300,000 $280,000 $120,000 $700,000
Variable Expenses
160,000 175,000 105,000 440,000
Contribution Margin
140,000 105,000 15,000 260,000
Fixed Expenses
65,000 35,000 40,000 140,000
Net Income
$75,000 $70,000 $(25,000) $120,000
Ellen Electric has an offer from a potential supplier to provide 40,000 units at $65 each that Ellen Electric now manufactures at a total cost of $75 per unit. The manufacturing costs for 40,000 units are: direct materials $900,000; direct labor $450,000; variable overhead $900,000; and fixed overhead $750,000. All costs except $500,000 in fixed overhead will be avoided if the parts are purchased.
Required:
(A) What should Ellen Electric do in this situation? Explain fully and show your computations.Would your answer change if Ellen Electric could use the capacity that would become available to produce additional income of $125,000? Explain.
Explanation / Answer
Current cost of manufacturing the 40000 parts = Sum of all costs = 900,000 + 450,000 + 900,000 + 750,000 = 3,000,000
Cost of purchasing = 40000 * 65 = 2,600,000
Fixed overhead that cannot be avoided = 500,000
So total cost if the parts are purchased = 2,600,000 + 500,000 = 3,100,000
The costs incurred if parts are purchased is 100,000 more than the cost of manufacturing.
So it is advisable to manufacture the parts.
(B)
If the company can generate an additional income of 125,000
then the additional income due to purchasing parts = increase in income - increase in cost = 125,000 - 100,000 = 25,000
So in this scenario, it is advisable to purchase parts.
Please rate my answer!
Thanks in advance :)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.