Solution 6b-1 Introduction to Managerial Accounting

Suggested Solution to Discussion Questions

Unit 4-make or buy decisions

6-A1 (20 min)

1. The key to this question is what will happen to the fixed overhead costs if production of the boxes is discontinued. Assume that all $46,800 of fixed costs will continue. Then, Vineyard Fruit will lose $16,800 by purchasing the boxes from Weyerhaeuser:

Payment to Weyerhaeuser, 60,000 × $2.24 $134,400

Costs saved, variable costs ($96,000 + $12,000 + $9,600) 117,600

Additional costs $ 16,800

2. Some subjective factors are:

Might Weyerhaeuser raise prices if Vineyard Fruit closed down its box-making facility?

Will sub-contracting the box production affect the quality of the boxes?

Is a timely supply of boxes assured, even if the number needed changes?

Does Vineyard Fruit sacrifice proprietary information when disclosing the box specifications to Weyerhaeuser?

3. In this case the fixed costs are relevant. However, it is not the depreciation on the old equipment that is relevant. It is the cost of the new equipment. Annual cost savings by not producing the boxes now will be:

Variable costs $117,600

Investment avoided (annualized), $375,000 ÷ 5 75,000

Total saved $192,600

The payment to Weyerhaeuser is $192,600 - $134,400 = $58,200 less than the savings, so Vineyard Fruit would be $58,200 better off subcontracting the production of the boxes.

6-B1 (15-20 min.)

1. Make Buy

Total Per Unit Total Per Unit

Purchase cost €10,000,000 €50

Direct material €5,500,000 €27.50

Direct labor 1,900,000 9.50

Factory overhead, variable 1,100,000 5.50

Factory overhead, fixed

avoided 900,000 4.50

Total relevant costs €9,400,000 €47.00 €10,000,000 €50

Difference in favor of making € 600,000 € 3.00

The numerical difference in favor of making...