2 Make or Buy, Qualitative Considerations Problem 13-31 Howarth Dental is a larg

Question

2 Make or Buy, Qualitative Considerations Problem 13-31 Howarth Dental is a large dental practice Currently, Howarth has its own dental laboratory to produce porcelain and gold crowns. The unit costs to produce the crowns are as follows: Gold Raw materials Direct labour Variable overhead Fixed overhead Porcelain $125 35 12 26 S198 $160 35 12 26 S233 Total Fixed overhead is detailed as follows: Salary (supervisor) Depreciation Rent (lab facility) S32,000 6,000 34,000 Overhead is applied on the basis of direct labour hours. These rates were computed by using 6,200 direct labour hours. I dental laboratory has offered to supply Howarth all the crowns it needs. Its price is A local S190 for porcelain crowns and $205 for gold crowns; however, the offer is conditional on supply- ing both types of crowns- it will not supply just one type for the price indicated. If the offer is accepted, the equipment used by Howarth's laboratory would be scrapped (it is old and has no market value), and the lab facility would be closed. Howarth uses 2,400 porcelain crowns and 650 gold crowns per year.

Explanation / Answer

Variable cost is a cost that varies with level of sales whereas fixed cost is a cost that remain constant irrespective of level of sales .Therefore Fixed cost is irrelevant while making decision unless avoidable

Production supervisor will be laid off and rent will be avoided(so they both are relevant since it will be saved if crowns are purchased)

[2400*190]+[650*205]

456000+133250

589250

variable cost of making :

Porcelain : 125+35+12= 172 or 172*2400= 412800

Gold :160+35+12= 207*650= 134550

Since the total cost of purchase is less than cost to make ,crowns should be purchased

2)Qualitative Factors:

Whether the market share will be diluted.

Quality provided is as needed

other use of available facilities

3)Rent is a irrelevant since it is unavoidable .

Total cost to make : 547350 + 32000 = $ 579350

since the cost to make is less than cost of purchased ,crown should be manufactured.

4)Cost to purchase : [4200*190]+[650*205]

         = 798000+ 133250

            = 931250

Cost to make : [172*4200]+[207*650]+32000+34000

        = 722400+ 134550+32000+34000

         = 922950

Since the cost to make is less cost to purchase ,crown should be manufactured.

Purchase Make Cost

[2400*190]+[650*205]

456000+133250

589250

Variable cost of making 412800+134550=547350 Fixed overhead 32000+34000= 66000 Total cost` 589250 613350

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.