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

Question

Koch Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Koch produces a relatively small amount (18,000 units) of the cream and is considering the purchase of the product from an outside supplier for $5.30 each. If Koch purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Koch’s accountant constructed the following profitability analysis.

a. Identify the cost items relevant to the make-or-outsource decision. (Total Avoidable Costs = ?)

b. What is the avoidable cost per unit if the outsourcing decision is taken? (Total Avoidable Costs = ? per unit)

c. Suppose that Koch is able to increase sales by 10,000 units (sales will increase to 28,000 units). Calculate the total avoidable costs. (Total Avoidable Costs = ?)

Revenue (18,000 units × $13.00) $ 234,000      Unit-level materials costs (18,000 units × $1.10) (19,800 )      Unit-level labor costs (18,000 units × $0.80) (14,400 )      Unit-level overhead costs (18,000 × $0.80) (14,400 )      Unit-level selling expenses (18,000 × $0.10) (1,800 )   Contribution margin 183,600      Skin cream production supervisor’s salary (51,000 )      Allocated portion of facility-level costs (13,100 )      Product-level advertising cost (40,000 )   Contribution to companywide income $ 79,500

Explanation / Answer

a Avoidable Cost Material Cost labor Cost Unit level overhead Cost Skin Cream production supervisor salary Allocated portion of facility level cost b Avoidable Cost per unit Material Cost 1.1 labor Cost 0.8 Unit level overhead Cost 0.8 Skin Cream production supervisor salary (51000/18000)                                   2.83 Allocated portion of facility level cost (13100/18000)                                   0.73 Avoidable Cost per unit 6.26 c Total Avoidable Cost Material Cost                               30,800 labor Cost                               22,400 Unit level overhead Cost                               22,400 Skin Cream production supervisor salary                               51,000 Allocated portion of facility level cost                               13,100 Total Avoidable Cost                             139,700

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