Kasten, Inc budgeted 10,000 widgets for production during 2013. Kasten has capac
ID: 3005270 • Letter: K
Question
Kasten, Inc budgeted 10,000 widgets for production during 2013. Kasten has capacity to produce 12,000 units. Fied factory overhead is allocated to production. The following estimated costs were provided:
Direct material ($7.00/unit) $70,000
Direct Labor ($15/hr x 2 hrs/unit) 300,000
Vairable manufacturing overhead )$4/unit) 40,000
Fixed factory overhead costs ($5/unit) 50,000
Total $460,000
Cost per unit = $46
1. Kasten received an order for 1,000 units from a new customer in a country in which Kasten has never done business. This customer has offered $43 per widget. Should Kasten accept the order?
2. Kasten received an offer from another company to manufature the same quality widgets for $39. Should Kasten let someone else manufacture all 10,000 widgets and focus only on distribution?
Explanation / Answer
1.
Received an order for 1,000 units
Cost per unit = $46
now
Incremental revenue per widget = $43
Incremental cost per widget: =( Direct material + Direct Labor + Vairable manufacturing overhead) =
$7 + ($15 × 2) + $4 = 41
Incremental profit per unit = 43 - 41 = $2
Total incremental profit = $2 × 1,000 = $2,000
Kasten can make an extra $2,000
2.
Cost to buy per widget = $39
Cost to make per widget: = ( Direct material + Direct Labor + Vairable manufacturing overhead) =
$7 + ($15 × 2) + $4 = 41
Incremental savings per widget if purchased =41 - 39 = $2
Total incremental savings if purchased = $2 × 10,000 = $20,000
Thus we can say
Kasten will save $20,000 if it buys instead of makes
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