Townsend Chemical Company makes a variety of cosmetic products, one of which is

Question

Townsend Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs aging. Townsend produces a relatively small amount (13,000 units) of the cream and is considering the purchase of the product f an outside supplier for $5.80 each. If Townsend purchases from the outside supplier, it would continue to sell and distribute the under its own brand name. Townsend's accountant constructed the following profitability analysis Revenue (13,000 units × $13.00) $169,000 Unit-level materials costs (13,000 units × $1.30) Unit-level labor costs (13,000 units × $0.70) Unit-level overhead costs (13,000 × $0.40) Unit-level selling expenses (13,000 × $0.30) (16,900) (9,100) (5,200) 3.900 133,900 (64,000) (13,900) (44,000) 12,000 Contribution margin Skin cream production supervisor's salary Allocated portion of facility-level costs Product-level advertising cost Contribution to companywide income Required a. Identify the cost items relevant to the make-or-outsource decision b. What is the avoidable cost per unit if the outsourcing decision is taken? Should Townsend continue to make the product or bu from the supplier? c. Suppose that Townsend is able to increase sales by 14,000 units (sales will increase to 27,000 units). Calculate the total avoida costs. At this level of production, should Townsend make or buy the cream? Complete this question by entering your answers in the tabs below Required A Required B Required C Identify the cost items relevant to the make-or-outsource decision Total avoidable costs

Explanation / Answer

a. Cost Items Revelent to Make or Buy decision Variable: In $ Material Costs 16900 Labor costs 9100 Overhead Costs 5200 Fixed: Production Supervisor Salary 64000 Total 95200 b. Avoidable Cost Per Unit if Outsource Variable: In $ Material Costs 1.3 Labor costs 0.7 Overhead Costs 0.4 Fixed: Production Supervisor Salary (64000/13000) 4.92 Total 7.32 Net Incremental profi/loss if outsorce Total Avoidable Costs In $ Variable (1.3+.7+.4)*13000 31200 Fixed :Production Supervisor salary 64000 Total 95200 Less: Outsource Cost (5.8*13000) 75400 Total Incremental profit if outsorce 19800 Yes, company should buy from supplier. c. Total Avoidable Costs In $ Variable (1.3+.7+.4)*27000 64800 Fixed :Production Supervisor salary 64000 Total 128800 Less: Outsource Cost (5.8*27000) 156600 Total Incremental loss if outsorce -27800 The company should make at this production level.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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