iss Quality, Inc. produces several models of clocks. An outside supplier has off

ID: 2510213 • Letter: I

Question

iss Quality, Inc. produces several models of clocks. An outside supplier has offered to the clocks r Swiss Quality for $350 each. Swiss Quality needs 500 clocks annu lowing unit costs for its clocks: ally. Swiss Quality has Direct materials Direct labor Variable overhead Fixed overhead (30% avoidable) $ 70 80 75 120 Reguired: Prepare an incremental analysis to determine whether the company should make or buy the clocks. B). (24 Points). A saudi company produces three products: Plastic nuts, Iron nuts, and Gold nuts. Results of the 3" quarter are below: Plastic nuts Iron nuts Gold nuts Total 6,000 2,000 2,000 Units sold Revenue Variable costs Fixed costs (50% avoidable) Net income 2,000 $62,000 $43,000 $26,000 S131,000 44,000 10,000 24,00013,000 81,000 4,000 17,000 ($4,000)$8,000 3,000$7000 3,000 Required: Prepare an incremental analysis to determine if the Plastic product should be eliminated or continued

Explanation / Answer

Solution:

Problem A----

Decision making – whether make or buy the product

Question is related on the decision making based on relevant cost.

Relevant Cost is the cost which will be incurred in future and different under each alternative course of action. The following costs are considered as relevant cost:

- Direct material cost

- Direct labor cost

- Variable manufacturing overhead

- Variable Cost of Goods Sold

- Variable selling and administrative expenses

- Fixed Cost which is directly related to the alternative course of action.

The above costs are the variable cost which will vary with the production volume. Hence these costs have both the characteristic of relevant cost i.e. it is a future cost and different under each alternative course of action.

Sometimes there are some fixed costs which will directly associated with the production or increase production units and have characteristics of relevant cost. i.e. future cost and different under each alternative course of action.

Irrelevant cost is the costs which do not play any role in decision making. Irrelevant Cost is the SUNK Cost which has already been incurred and does not change whether company accept or reject the order. Hence it is treated as IRRELEVANT COST.

In the given question,

Relevant Cost is Direct materials, Direct labor, Variable Overhead and the Fixed overhead which are avoidable because avoidable fixed overhead will not incur in future if the product will be not manufactured.

Incremental Analysis to determine make or buy the clocks

Make

Buy

Incremental Profit (loss)

Price offered (350*500)

$175,000

-$175,000

Direct materials (500*70)

$35,000

Direct labor (500*80)

$40,000

Variable Overhead (500*75)

$37,500

Fixed Overhead (500*120)

$60,000

$42,000

$18,000

TOTAL COST

$172,500

$217,000

-$44,500

Company should not buy the Clock from outside supplier since the total cost of buying the product is higher than the making in house. It is advised to make the product.

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

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