Penrith Ltd makes deluxe fudge for royalty (and peasants like us) Penrith curren

Question

Penrith Ltd makes deluxe fudge for royalty (and peasants like us) Penrith currently churns its own butter to just the right consistency for fudge, but is considering purchasing butter from an external source. Each box of fudge requires 15 ounces of butter which can be purchased at $0 20 per ounce. Deluxe fudge sells for $20 per box. Cost information is as follows: Direct materials (includes milk for butter production of $23,000)s 50,000 Direct labour (includes wages for churning of $20,000) Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs Total cost per unit (at 12000 boxes) 70,000 10,000 40,000 $170,000 $ 14.17 a) Calculate the incremental increase or decrease to net income if the butter is purchased extemally s but the quality of the tudge is lower when outsourced butter is used Penrith suspects it may have to lower the price of the tudge by $1 50 per box Calculate the new incremental increase (or decrease) to net income in buying butter Wait a second, Penrith will have excess capacity If they dont churn the butter. With this excess capacity they can make and sell an additional 1,500 boxes of fudge (c) Calculate the contribution margin per box of tudge (purchasing the buttern $ (d) Calculate the opportunity cost of making the 1,500 boxes of fudge with excess capacity $ (e) Considerning all the above (and excluding qualitative considerations, should Pennith make or buy the butter? per box

Explanation / Answer

(a)

(b)

(c)

(d) Opportunity cost of making 1500 boxes of fudge with the excess capacity = 1500 x $8.25 = $12375

(e) Excluding the qualitative considerations, Penrith should buy the butter.

Make Buy Incremental Increase (Decrease) in Net income Sales revenue (12000 x $20) 240000 240000 0 Direct materials 50000 27000 23000 Direct labor 70000 50000 20000 Variable manufacturing overhead 10000 10000 0 Fixed manufacturing overhead 40000 40000 0 Purchase price (12000 x 15 x $0.20) 0 36000 -36000 Net income $ 70000 77000 7000

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