ACCT 210 1st Edition Lecture 10Outline of Last Lecture I. 8.1: Identifying relevant informationII. 8.2: Special order pricingIII. 8.3: Make or buy decisionsOutline of Current Lecture I. 8.3 ContinuedII. 8.4: Allocating constrained resourcesCurrent Lecture1. 8.3 Continueda. Outsourcing vs. off-shoringi. Underarmor produces clothes in the U.S.; they decide to start manufacturing in China instead because it’s cheaperii. This is off-shoring NOT outsourcingb. Make or buy decision: do I make it myself or outsource (buy) from someone else?c. Exercise 8-8i. The Outland Company manufactures 1,020 units of a part that could be purchased from an outside supplier for $13 each. Outland's cost to manufacture each part are as follows:Direct materialsDirect laborVariable manufacturing overheadFixed manufacturing overhead$3 3 4 8Total $18All fixed overhead is unavoidable and is allocated based on direct labor. The facilities that are used to manufacture the part have no alternative uses. ii. Should Outland continue to manufacture the part? Show your calculations.Relevant costs: DM, DL, VOHIrrelevant: FOHDM + DL + VOH = VC = $10$10 < $13; Yes they should continue to manufacture itd. Exercise 8-9i. Thomas Corporation makes bicycles. It has always purchased its bicycle tires from the Firelock Company at $11 each, but is currently considering making the tires in its own factory. The estimated costs per unit of makingthe tires are as follows:Direct materialsDirect laborVariable manufacturing overhead$4 4 2The company's fixed expenses would increase by $29,460 per year if managers decided to make the tire.ii. Ignoring qualitative factors, if the company needs 6,275 tires a year, should it continue to purchase them from Firelock or begin to produce them internally?If they make themselves:VC/unit = $4 + $4 + $2 = $10Total VC = $10 x 6,275 = $62,750Total cost = $62,750 +$29,460 = $92,210If they continue to purchase from FirelockTotal cost = $11 x 6,275 = $69,025$69,750 < $92,210They should continue to purchase them from Firelock2. 8.4: Allocating constrained resourcesa. Only so much output you can produce (limited by labor hours, machine hours, etc.)b. Allocation: way to decide how to allocate scarce resources across businessi. Focus on highest contribution margin per unit of scarce resourcec. Exercise 8-13i. Umbrella Co. is considering the introduction of three new products. Per unit sales and cost information are as follows:A B CSales price $4.00 $7.00 $13.00Variable costsFixed costsLabor hours per unitMonthly demand in units$1.20$0.501.2 hours610$3.40$1.000.5 hours475$12.00$3.505 hours240The company only has 1,800 excess direct labor hours.ii. How many of each product should Umbrella Co. produce and sell to maximize its profit?Contribution margin per unit:Product A: CM = $4 - 1.2 = $2.80Product B: CM = $7 - 3.4 = $3.60Product C: CM = $13 – 12 = $1.00Contribution margin per labor hour:Product A: $2.8 ÷ 1.2 = $2.33Product B: $3.6 ÷ 0.5 = $7.20Product C: $1 ÷ 5 = $0.20Order of product: Produce all available of B, all of A, and what’s left of CProduce Hours/unit Hours used(# producedx hrs/unit)Hrs available(1800 –hours used)BAC610475185*0.51.2530557092514959250*Only produce 185 because there are only 925 labor hours left. 925 ÷ 5 =
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