Chapter 23 Pre Assignment Exercise Question 5 (of 10) 5. value: 1.00 points Kand

Question

Chapter 23 Pre Assignment Exercise Question 5 (of 10) 5. value: 1.00 points Kando Company incurs a $12.00 per unit cost for Product A, which it currently manufactures and sells the $12.00 per unit costs assigned to Product A would be eliminated. 1. Prepare Incremental cost analysis. Should the company continue to manufacture Product A or purchase $13.50 per unit Instead of manufacturing and selling this product, the company can purchase Product E for $5.00 per unit and sell it for $11.90 per unit. If it does so, unit sales would remain unchanged and the company can purchase Product B for $5.00 of Product B for resale? (Round your answers to 2 decimal places.) Product A Product B Sales 13.50 Costs: Avoidable costs Cost to purchase Total costs The company should:

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5)

Avoidable costs are those which are incurred if the production is done. They are relevant costs are are taken for decision making.

Unavoidable costs are generally allocation of fixed overheads to the products produced. They are to be incurred even if production is not done. Unavoidable costs are not relevant in decision making.

Since there is no change in number of units produced, unavoidable costs are also allocated in the same proportion to B as was allocated to A. So, from the above table, it is clear that the organization should continue Manufacturing A.

Manufacture A Purchase B Sales 13.5 11.9 Costs: Avoidable costs 5 0 Unavoidable costs 7 7 Cost to purchase 0 5 Total costs 12 12 Margin 1.5 -0.1

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