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Rooney Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Rooney produces a relatively small amount (16,000 units) of the cream and is considering the purchase of the product from an outside supplier for $5.50 each. If Rooney purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name.
Rooney's accountant constructed the following profitability analysis:
Revenue (16,000 units x $14.00)
Unit-level materials costs (16,000 units x $1.50)
Unit-level labor costs (16,000 units x $0.70)
$224,000
(24,000)
(11,200)
Unit-level overhead costs (16,000 x
$0.10)
(1,600)
Unit-level selling expenses (16,000
x $0.40)
(6,400)
Contribution margin
180,800
Skin cream production supervisor's salary
(60,000)
Allocated portion of facility-level costs
(13,800)
Product-level advertising cost
(43,000)
Contribution to companywide income
$ 64,000
Question 1: Identify the cost items relevant to the make-or-outsource decision.
Question 2: What is the avoidable cost per unit if the outsourcing decision is taken? Should Rooney continue to make the product or buy it from the supplier?
Question 3: Suppose that Rooney is able to increase sales by 13,000 units (sales will increase to 29,000 units). Calculate the total avoidable costs. At this level of production, should Rooney make or buy the cream?
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