Use the following to answer question 22 Fleeting Moscow Nights currently manufac

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Use the following to answer question 22 Fleeting Moscow Nights currently manufactures a wicket as its main product. The costs per unit are as follows: Direct materials and direct labor Variable overhead Fixed overhead Total S33 22. Fleeting Moscow Nights Inc has contacted Old Prof Mullen with an offer to sell him 5,000 bottles of premium KGB vodka for $54 each. If that Sly Old Prof makes his own KGB vodka, variable costs are $48 per unit (DM and DL-$33 and VOH- $15). Fixed costs are $24 per uni t; however, $15 per unit is unavoidable. Should the Old Prof make or buy the vodka? A) Buy; savings $45,000 B) Buy; savings $15,000 D) Make; savings $15,000 23. Buyer Beware Toy Company is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $30 and Buyer Beware Toy would sell it currently for $65. The cost to assemble the product is estimated at $21 per unit and the company believes the market would support a new price of $85 on the assembled unit. What decision should be made about whether to sell or process further? A) Sell before assembly, the company will be better off by $1 per unit. B) Sell before assembly, the company will be better off by $20 per unit C) Process further, the company will be better off by $29 per unit. D) Process further, the company will be better off by $14 per unit. Meow Company is starting business and is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $80 and Meow Company would sell it currently for $180. The cost to assemble the product is estimated at $36 per unit and Meow Company believes the market would support a new price of S232 on the assembled unit. What is the correct decision using the sell or process further decision rule? A) Sell before assembly, the company will be better off by $36 per unit. B) Sell before assembly, the company will be better off by $52 per unit. C) Process further, the company will be better off by $52 per unit. D) Process further, the company will be better off by $16 per unit. 24. 6 Page 6

Explanation / Answer

22.

Since the fixed cost is unavoidable, it is irrelevant to this make or buy decision. Only the variable cost will be considered while deciding whether the vodka bottles should be made or purchased.

If the Old Prof. buys the vodka, he will have to pay $54 per bottle.

Total cost to buy 5,000 bottles = $54 x 5,000 = $270,000

If the Old Prof. makes the vodka, he will incurr $48 per bottle.

Total cost to make 5,000 bottles = $48 x 5,000 = $240,000

Thus,

If the Old Prof. makes the vodka he will save $30,000 ($270,000 - $240,000).

Hence,

The correct answer is C) Make; savings $30,000

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