19. It costs Strawberry Fields $21 of variable costs and $9 of allocated fixed c

Question

19. It costs Strawberry Fields $21 of variable costs and $9 of allocated fixed costs to produce an industrial trash can that sells for $45. A buyer in Mexico offers to purchase 3,000 units at $27 each. Strawberry Fields has excess capacity and can handle the additional production. What effect will acceptance of the special order offer have on net income? A) Decrease $9,000 B) Increase $9,000 C) Increase $81,000 D) Increase $18,000 20. Ballerina Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead $60,000 10,000 30,000 20,000 If Ballerina Manufacturing Company can purchase the component externally for $110,000 and only $5,000 of the fixed costs can be avoided (eliminated, reduced, goes away) what is the correct make-or-buy decision? A) Make and save $5,000 B) Buy and save $5,000 C) Make and save $15,000 D) Buy and save $15,000 21. Koshka a produces corn chips. The cost of one batch is below: Direct materials Direct labor Variable overhead Fixed overhead An outside supplier has offered to produce the com chips for $25 per batch. How much will Koshka save if it accepts the make or buy offer? None of the fixed overhead goes away (reduced, avoided, eliminated). A) $2.00 per batch B) $17.00 per batch C) $31.00 per batch D) $6.00 per batch $18.00 13.00 11.00 14.00 Page 5

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19 Net income will increase by $18000 Sale Price 27 Less Variable Cost 21 Net Income 6 Units Sold 3000 Total Net Income 18000 20 Cost if Bought Externally 110000 add: Fixed Cost (unavoidable) 15000 Total Buy Cost 125000 Make Cost -Direct Material 60000 -Direct Labor 10000 -Variable OVH 30000 -Fixed OVH 20000 Make Cost 120000 Buying cost of $125000 is more than make cost of $120000 and hence Making inhouse is correct decision 21 Cost avoided if bought externally: -Direct Material 18 -Direct Labor 13 -Variable OVH 11 -Fixed OVH 0 Total avoided cost 42 Less: Paid for buying externally 25 Hence Saving will be 17

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