Strategic Cost Management

– Decision Making
V Thilagam
Make or Buy
• Finch Company manufactures a part for its production cycle. The costs per unit for 5,000
units of this part are as follows:
•
• Direct materials $3
• Direct labor 5
• Variable factory overhead 4
• Fixed factory overhead 2
• Total costs $14
•
• The fixed factory overhead costs are unavoidable. Scalding Corporation has offered to sell
5,000 units of the same part to Finch Company for $15 a unit. Assuming no other use for the
facilities, Finch Company should make or buy?
 make the part to save $3 per unit
 
$15 - ($3 + $5 + $4) = $3 Savings
Tender Company manufactures a part for its production cycle.
The costs per unit for 5,000 units of this part are as follows:

Direct materials $3
Direct labor 5
Variable factory overhead 4
Fixed factory overhead 2
Total costs $14
The fixed factory overhead costs are unavoidable.
Assume that Tender Company has been offered 5,000 units of
the part from another producer for $15 each.
The facilities currently used to make the part could be rented out
to another manufacturer for $20,000 a year. Tender Company
should make or buy:
 Buy the part to save $1 per
unit

Buy: (5,000 x $15) - $20,000 =

$55,000
Make: (5,000 x $12) = $60,000; and
($60,000 - $55,000) / 5,000 units =
$1 per unit
• Deuce Company currently produces 10,000 units of a key part at a
total cost of $512,000. Variable costs are $300,000. Of the fixed cost,
$140,000 relate specifically to this part. The remaining fixed costs are
unavoidable.
• Another manufacturer has offered to supply the part for $48 per unit.
The facilities currently used to manufacture the part could be used to
manufacture a new product with an expected contribution margin of
$30,000. Alternately, the facilities could be rented out at $60,000.
Given all of these alternatives, _______________ is Deuce Company’s
lowest net cost per unit for the part.
• $42

• 
• $48 x 10,000 units = $480,000, and
• ($480,000 - $60,000) / 10,000 units = $42 per unit
• Woods Corporation has a joint process that produces three products:
P, G, and A. Each product may be sold at split-off or processed further
and then sold. Joint processing costs for a year amount to $25,000.
Other relevant data are as follows:
• Separable
• Processing
• Sales Value Costs after Sales Value
• Product at Split‑off Split‑off at Completion
• 
• P $62,000 $5,000 $88,000
• G 12,500 6,500 19,000
• A 9,400 5,000 12,000
• 
• Product G: should processed or sold at split off
• d. can be processed further or sold at split‑off; there is no
difference in profit.
• 
• ($19,000 - $12,500) - $6,500 = $0
• Cancun Corporation has a joint process which produces three
products: X, Y, and Z. Each product may be sold at split-off or
processed further and then sold. Joint processing costs for a year
amount to $100,000. Other relevant data are as follows:
• Separable
• Processing
• Sales Value Costs after Sales Value
• Product at Split‑off Split‑off at Completion
• 
• X $128,000$16,000 $160,000
• Y 75,000 26,000 99,000
• Z 32,600 20,000 50,000
• Once product X is produced, processing it further will cause profits
to:
• d. increase by $16,000
• 
• ($160,000 - $128,000) - $16,000 = $16,000
• Grape Company produces three products using a joint process which
accumulates $25,000 in joint costs. The products, A, B, and C, can be
sold at split‑off or processed further and then sold. The production
level for each product is 10,000 units. The following unit information
is also available
• Separable
• Processing
• Sales Value Costs after Sales Value
• Product at Split‑off Split‑off at Completion
• 
• A $12 $9 $21
• B 10 4 17
• C 15 6 19
• 
• Which Product should be processed beyond the split-off point and why:
• 
• None of these answers is correct.
• 
• $19 - $15 - $6 = $(2)
• 
• Rush Company gathered the following information regarding its one and only product:
• 
• Direct materials used $9,000
• Direct labor 17,000
• Variable factory overhead 13,000
• Fixed factory overhead 8,000
• Variable selling and administrative expenses 15,000
• Fixed selling and administrative expenses 8,000
• 
• Units produced and sold 10,000
• Selling price per unit $10
• Compute the unit manufacturing cost of the product under the
absorption approach.
• 
• b. Compute the unit manufacturing cost of the product under the
contribution approach.
• 
• c. Compute the effect on net income of accepting a special order
for 500 units at $10 per unit assuming excess capacity.
• ($9,000 + $17,000 + $13,000 + $8,000) / 10,000 = $4.70 per unit
• 
• ($9,000 + $17,000 + $13,000) / 10,000 = $3.90 per unit
• 
• ($10.00 - $3.90) x 500 units = $3,050 increase in net income
• Williams Company has been producing and selling 100,000 units per year. They have excess capacity. The following budget
was prepared for the next year
• 
• Selling price per unit $12.50
•
• Variable cost per unit:
• Direct materials $5.00
• Direct labor 3.00
• Overhead 1.00
• Selling and administrative .25
•
• Fixed costs in total:
• Overhead $80,000
• Selling and administrative 35,000
• 
• a. Prepare an income statement using the contribution approach.
• 
• b. Prepare an income statement using the absorption approach.
• Cover-up manufactures two products, Hats and Caps. The following information is available:
• Hats Caps
• 
• Selling price per unit $21 $13
• Variable cost per unit $12 $9
• Labor hours required 3 1
• Total fixed costs$52,000
• 
• Labor hour capacity for the year is 15,000 hours.
• 
•
• a. Which product has the higher contribution margin per unit?
• 
• b. Which product has the higher contribution margin per hour?
• 
• c. Assume that Cover-up can produce only one product. What will
net income be?
• Answer:

• a. The hats would have the higher contribution margin per unit of $9 ($21 - $12).
 
• b. The caps would have the higher contribution margin per hour of $4 [($13 - $9) /
1 hour].
 
• c. (15,000 hours @ 1 hour per unit) x $4 = $60,000
• $60,000 - $52,000 = $8,000