ACCT 210 1st Edition Lecture 10 Outline of Last Lecture I 8 1 Identifying relevant information II 8 2 Special order pricing III 8 3 Make or buy decisions Outline of Current Lecture I 8 3 Continued II 8 4 Allocating constrained resources Current Lecture 1 8 3 Continued a Outsourcing vs off shoring i Underarmor produces clothes in the U S they decide to start manufacturing in China instead because it s cheaper ii This is off shoring NOT outsourcing b Make or buy decision do I make it myself or outsource buy from someone else c Exercise 8 8 i 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 materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead 3 3 4 8 Total 18 All 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 VOH Irrelevant FOH DM DL VOH VC 10 10 13 Yes they should continue to manufacture it d Exercise 8 9 i 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 making the tires are as follows Direct materials Direct labor Variable manufacturing overhead 4 4 2 The 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 10 Total VC 10 x 6 275 62 750 Total cost 62 750 29 460 92 210 If they continue to purchase from Firelock Total cost 11 x 6 275 69 025 69 750 92 210 They should continue to purchase them from Firelock 2 8 4 Allocating constrained resources a 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 business i Focus on highest contribution margin per unit of scarce resource c Exercise 8 13 i Umbrella Co is considering the introduction of three new products Per unit sales and cost information are as follows A Sales price 4 00 B 7 00 C 13 00 Variable costs Fixed costs Labor hours per unit Monthly demand in units 1 20 0 50 1 2 hours 610 3 40 1 00 0 5 hours 475 12 00 3 50 5 hours 240 The 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 80 Product B CM 7 3 4 3 60 Product C CM 13 12 1 00 Contribution margin per labor hour Product A 2 8 1 2 2 33 Product B 3 6 0 5 7 20 Product C 1 5 0 20 Order of product Produce all available of B all of A and what s left of C Produce B A C 610 475 185 Hours unit 0 5 1 2 5 Hours used produced x hrs unit Hrs available 1800 hours used 305 570 925 1495 925 0 Only produce 185 because there are only 925 labor hours left 925 5 185
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