Question 1: Make or buy Note, the fixed costs are unavoidable. An outside suppli

Question

Question 1: Make or buy

Note, the fixed costs are unavoidable. An outside supplier has offered to sell Coleman Company the grills at $22 per unit.Coleman Company manufactures the grills for high end outdoor camping stoves and produces 18,000 units per year. The grills, used in a few different products that Coleman Company produces has the following information:

Per Unit

Direct Materials

$8.00

Direct Labour

5.00

Variable Overhead

7.00

Fixed Overhead

6.00

Unit Cost

$26

a) Complete the make or buy analysis table (3 marks)

Production Cost per unit

Per Unit Differential Costs

(18,000 units)

Make

Buy

Direct Materials

Direct Labour

Variable Overhead

Fixed Overhead

Outsource Price

Total Relevant Cost

b) Should Colman Company make or buy the grills and why (2 marks)?

c) What is the maximum price that Coleman Company would be willing to pay an outside supplier for the grills (1 mark)?

d) If Coleman Company could buy the grills for $18 from a different company, by how much will operating income increase or decrease (Show your work) (2 marks)?

e) Would you change your decision to make or buy with the new price of $18? Why (2 marks)?

Question 2: Keep or Drop

BBQ Company has three product lines. Gas barbeques, charcoal barbecues, and barbecue accessories. During the last few years charcoal barbeque sales have declined steadily leading management to question if this product is worth keeping. The contribution margin statement for the charcoal line is shown below:

BBQ Company – Charcoal Barbeques

Contribution Margin Statement for the Segment

For the Year Ended November 30, 2017

Revenue

$ 1,360,500

Variable Costs

1,053,000

Contribution Margin

307,500

Fixed Costs

500,000

Operating Income (loss)

$192,500

Additional Information:

75% of the segments fixed costs will remain the same if the line is discontinued and the remaining 25% will no longer be incurred.

Contribution margin will increase by $125,000 in the other segments of BBQ company if the product is discontinued

Calculate the incremental effect (4 marks):

Lost Contribution Margin

Avoidable Fixed Costs

Incremental Contribution Margin (Other segments)

Incremental Effect

Should BBQ Company discontinue the Charcoal segment? Why or why not? (2 marks)

Per Unit

Direct Materials

$8.00

Direct Labour

5.00

Variable Overhead

7.00

Fixed Overhead

6.00

Unit Cost

$26

Explanation / Answer

ans 1 Production Cost per unit Per Unit Differential Costs Differential cost in $ (18,000 units) Make Buy Make Buy Direct Materials $8 $8 0 $144,000 (18000*8) Direct Labour $5 $5 $90,000 0 (18000*5) Variable Overhead $7 $7 $126,000 0 (18000*7) Fixed Overhead 6 0 0 0 Outsource Price 0 22 396000 Total Relevant Cost $26 $20 $22 $360,000 $396,000 Ans b Colman company should make the grills as relevant cost to make is $20 while to buy is $22 ans c Maximum price that can be paid is $20 (which is the relevant cost to make). ans d Operating Income will increase by 18000*(20-18) 36000 ans e Yes at $18 grill could be bought from outside which will increase the operating income wil by $36000 Dear student I have done forst question completely

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