Kngaroo Company is producing a subassembly used in the production of a product.
ID: 2736921 • Letter: K
Question
Kngaroo Company is producing a subassembly used in the production of a product. The costs incurred for the subassembly follow:
Per Unit
Direct materials
$3.00
Direct labor
6.00
Variable factory overhead
1.00
Fixed supervisor salary
5.00
Depreciation expense on factory equipment
2.00
General fixed factory overhead allocated
4.00
Total costs
$21.00
The above per unit costs are based on 6,000 units. An outside supplier will provide 6,000 subassemblies for $17.00 per unit. The supervisor will be terminated if the subassemblies are not produced in house. The idle factory will be used to manufacture another product with a contribution margin of $20,000. What should Kangaroo do?
buy the subassemblies and save $8,000
make the subassemblies and save $4,000
make the subassemblies and save $8,000
buy the subassemblies and save $4,000
Per Unit
Direct materials
$3.00
Direct labor
6.00
Variable factory overhead
1.00
Fixed supervisor salary
5.00
Depreciation expense on factory equipment
2.00
General fixed factory overhead allocated
4.00
Total costs
$21.00
Explanation / Answer
The incremental benefit is calculated with the use of following table:
Answer is Buy the subassemblies and save $8,000 (which is Option A)
Notes:
1) Fixed supervisor salary is avoidable cost and will, therefore, be treated as a relevant cost in the calculation of cost of making the product.
2) Depreciation expense on factory equipment and general fixed factory overhead allocated are unavoidable costs and will, therefore, be treated as irrelevant costs.
3) The additional contribution margin that can be generated with the purchase of subassemblies will be treated as opportunity cost in case the company decides to make the subassembly.
Make Buy Differential Cost of Purchase 102,000 102,000 Direct Materials 18,000 0 -18,000 Direct Labor 36,000 0 -36,000 Variable Factory Overhead 6,000 0 -6,000 Fixed Supervisor Salary 30,000 0 -30,000 Opportunity Cost of Not Buying 20,000 0 -20,000 Total Cost $110,000 $102,000 -$8,000Related Questions
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