Freeman Electronics currently produces the shipping containers it uses to delive

Question

Freeman Electronics currently produces the shipping containers it uses to deliver the electronice sells. The monthly cost of producing 9,000 containers follows. Unit-level materials Unit-level labor Unit-level overhead Product-level costs* Allocated facility-level costs 6,000 6,000 3,300 10,500 27,400 One-third of these costs can be avoided by purchasing the containers. Baxi Container Company has offered to sell comparable containers to Freeman for $2.60 each. Required a-1. Calculate the total relevant cost Total relevant cost a-2. Should Freeman continue to make the containers? Yes No b-1. Freeman could lease the space it currently uses in the manufacturing process. If leasing would produce $12,400 per month, Calculate the total avoidable costs. Total avoidable costs b-2.Should Freeman continue to make the containers? Yes No

Explanation / Answer

a-1). Solution :- Total relevant cost = Unit level material + Unit level labor + Unit level overhead + Avoidable product level costs.

= 6000 + 6000 + 3300 + 10500 * 1 / 3

= 6000 + 6000 + 3300 + 3500

= $ 18800.

Conclusion :- Total relevant cost of making the containers = $ 18800.

a-2). Solution :- Total cost of buying the containers = 9000 * 2.60

= $ 23400.

Since the cost of buying containers for freeman electronics amounting to $ 23400 is more than the cost of making the containers amounting to $ 18800, Accordingly, The freeman electronics should continue to make the containers itself.

b-1). Solution :- Total avoidable costs = 18800 + 12400

= $ 31200.

Conclusion :- Total avoidable costs =  $ 31200.

b-2). Solution :- No, Freeman Electronics should not continue to make the containers because the total cost of making the containers amounting to $ 31200 is more than the total cost of buying containers amounting to $ 23400 for the freeman electronics.

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