Campbell Chemical Company makes a variety of cosmetic products, one of which is
ID: 2335692 • Letter: C
Question
Campbell Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Campbell produces a relatively small amount (19,000 units) of the cream and is considering the purchase of the product from an outside supplier for $4.90 each. If Campbell purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Campbell's accountant constructed the following profitability analysis Revenue (19,000 units x $12.00) $228,000 Unit-level materials costs (19,000 units x $1.40) Unit-level labor costs (19,000 units x $0.90) Unit-level overhead costs (19,000 x $0.50) Unit-level selling expenses (19,000 × $0.20) (26,600) (17,100) (9,500) 3,800 171,000 (46,000) (12,300) (38,000) Contribution margin Skin cream production supervisor's salary Allocated portion of facility-level costs Product-level advertising cost Contribution to companywide income $74,700Explanation / Answer
a.
Material cost, labor cost, overhead cost, and production supervisor’s salary are relevant to the make-or-outsource decision.
b.
Materials cost
$ 1.40
Labor cost
$ 0.90
Overhead cost
$ 0.50
Production supervisor's salary ($ 46,000/19,000)
$ 2.42
Total avoidable cost per unit
$ 5.22
Campbell should buy the product from supplier as the purchasing cost per unit is less than making.
c.
Materials cost ($ 1.4 x 29,000)
$40,600
Labor cost ($0.9 x 19,000)
$26,100
Overhead cost ($0.5 x 29,000)
$14,500
Production supervisor's salary
$46,000
Total avoidable cost for 29,000 unit
$127,200
Total avoidable cost per unit
$4.39
Total avoidable cost is $ 127,200.
At this level of production, Campbell should make the product as making is cheaper.
Materials cost
$ 1.40
Labor cost
$ 0.90
Overhead cost
$ 0.50
Production supervisor's salary ($ 46,000/19,000)
$ 2.42
Total avoidable cost per unit
$ 5.22
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