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1) King Jim Inc
1) King Jim Inc. produces a part that has the following costs per unit:
Direct material Direct labor Variable overhead Fixed overhead Total
$ 8 3 1 5 $17
Zero Co. can provide the part to King Jim for $19 per unit. King Jim Inc. has determined that 60 percent of its fixed overhead would continue if it purchased the part. However, if King Jim no longer produces the part, it can rent that portion of the plant facilities for $60,000 per year. King Jim Inc. currently produces 10,000 parts per year. Which alternative is preferable and by what margin? [ANSWER USING THIS FORMAT: Make/Buy - amount in favor of making or buying]
2. Rob Stark Co. sells a product for $18 per unit, and the standard cost card for the product shows the following costs:
Direct material $ 1
Direct labor 2 Overhead (80% fixed) 7 Total $10
Rob Stark received a special order for 1,000 units of the product. The only additional cost to Rob Stark would be foreign import taxes of $1 per unit. If Rob Stark is able to sell all of the current production domestically, what would be the minimum sales price that Rob Stark would consider for this special order?
Expert Solution
1)
| Make | |
| Materials | 10,000*8 = $80,000 |
| Direct Labor | 10,000*3 = $30,000 |
| Overhead | |
| Fixed | 10,000*5 = $50,000 |
| Variable | 10,000*1 = $10,000 |
| Total Costs | 80,000+30,000+50,000+10,000 = 170,000 |
| Buy | |
| Purchase price | 10,000*19 = $190,000 |
| Fixed Cost | 50,000*60% = 30,000 |
| Less: Rent amount Received from another company | -60,000 |
| Total Cost | 190,000+30,000-60,000 = 160,000 |
If company buy this part Company will save 170,000-160,000 = 10,000
2) Computation of Minimum Selling Price:
| Direct material | 1 |
| Direct labor | 2 |
| Variable overhead (7*20%) | 1.4 |
| Additional cost | 1 |
| Total Variable cost | 5.4 |
| Add: Contribution to be lost (18-4.4) | 13.6 |
| Minimum selling price | 19 |
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