Differential Analysis Peppermint and CO manufacture a variety of peppermint prod

Question

Differential Analysis Peppermint and CO manufacture a variety of peppermint products. One product is a peppermint fudge made with sweetened condensed milk that is made in house, but Peppermint and CO is deciding whether they should buy it from an outside supplier for $2.00 per pound. Manufacturing costs per unit of peppermint fudge and sweetened condensed milk are as follows for 12,000 units: Direct Materials: $2.75 Direct Labor: $2.15 Unit-related overhead: $1.30 Batch-related overhead: $9,000 The facility-sustaining overhead of $19,000 is allocated to each product line produced by the company based on relative sales in dollars. Batch-related overhead consists of 30 production runs. Each production run consists of 400 units and costs $300 per run. If Peppermint and CO decides to purchase 12,000 pounds of sweetened condensed milk, the cost of each production will drop to $200 per run. In addition it is estimated that direct materials, direct labor, and unit-related overhead will decrease by 45%, 15%, and 18% respectively.

A) Should Peppermint and CO make or buy the sweetened condensed milk?

B) If the supplier charges $ 2.25 per pound, should Peppermint and CO make or buy the sweetened condensed milk?

C) Refer to (B). If Peppermint and CO can rent the space needed for producing the sweetened condensed milk to another company for $15,000, should they make or buy it?

Explanation / Answer

A.) Peppermint and Co should buy sweetest condensed milk from outside.

Working:

B) When supplier charges $2.25 per pound then they should produce the sweetest condensed milk inhouse.

C)

They should buy the product as cost will be less.

Buy Make DM 18150 33000 DL 21930 25800 Unit related overhead 12792 15600 Batch related overhead 6000 9,000 Purchase Cost of sweetened condensed milk 24000 0 Cost of 12,000 units 82872 83400

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