Identify cost items relevant to make-or-outsource decision

Reference no: EM131896333

Problem

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 $5.20 each. If Koch purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Koch accountant constructed the following profitability analysis.

Revenue (18,000 units × $13.0)	234,000
Unit-level materials costs (18,000 units × $1.30)	(23,400)
Unit-level labor costs (18,000 units × $0.50)	(9,000)
Unit-level overhead costs (18,000 × $0.60)	(10,800)
Unit-level selling expenses (18,000 × $0.30)	(5,400)
Contribution margin	185,400
Skin cream production supervisor's salary	(64,000)
Allocated portion of facility-level costs	(12,800)
Product-level advertising cost	(45,000)
Contribution to companywide income	63,600

Required:

a. Identify the cost items relevant to the make-or-outsource decision.

b-1. What is the avoidable cost per unit if the outsourcing decision is taken?

b-2. Should Koch continue to make the product or buy it from the supplier?

Make
Buy

c-1. Suppose that Koch is able to increase sales by 10,000 units (sales will increase to 28,000 units). Calculate the total avoidable costs.

c-2. At this level of production, should Koch make or buy the cream?

Make
Buy.

Reference no: EM131896333

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