oX A chemical company spent $532,000 to produce 150,000 gallons of a chemical th
ID: 2518390 • Letter: O
Question
oX A chemical company spent $532,000 to produce 150,000 gallons of a chemical that can be sold for $ Problem 8 (10 points): 1.80 per gallon. This chemical can be further processed into a weed killer that can be sold for $8.20 per gallon. It will cost $270,000 to process the chemical into the weed killer. I the company decides to process further, how will it affect the operating income? Problem 9 (Bonus points 10) SoftSeats produces chairs and couches for reception areas and executive suites. Historically, SoftSeats has manufactured their own cushions for the chair they sell. However, a cushion manufacturer has recently approached SoftSeats with an offer to produce their cushions for them for $45 per cushion. SoftSeats incurs the following costs in the production of the seat cushions: $10 for direct materials, $20 for direct labor, $10 for variable overhead, and $10 for fixe overhead. Management is wondering whether they should accept the offer. What would be the increase or decrease in per-unit costs if the cushions were purchased from the outside supplier?Explanation / Answer
Req 1: Incremental analysis: Incremental revenue Sales after further processing (150,000 unist @8.20) 1230000 Less: sales at Splitt off point (150,000 units @ 4.80) 720000 Incremental cost 510000 Less: Further processing cost 270,000 Net inccrease in income 240,000 Req 2: Make Buy Differential cost Variable cost to manufacture: Material cost 10 10 Labour cost 20 20 Variable OH cost 10 10 Cost of supplier 45 -45 Differential cost 40 45 -5 Hence, the unit cocst will increase by $ 5 pr unit on purchase from outside.
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