Hi Tabya,
The problem is regarding make the product internally or buy it from the supplier.
In make or buy decision fixed cost is not considered.
Manufacturing overhead includes fixed and variable costs.
Blender Electric mixer
Hrs 1 hr = (16/16) 2hrs = (32/16)
Manufacturing FC 10*1 = 10$ 10*2 = 20$ [
fixed manufacturing overhead included in the cost per machine hour averages $10]Manufacturing VC 16-10 = 6 $ 32-20 =12$
Relevant cost 6+4+6 = 16$ 6+9+12= 27$
Contribution per
machine hour 20-16/1 =4$ 38-27/2 = 5.5$
In comparison with the supplier's cost, the firm is better off making the products
Since the mixer provides a higher contribution per machine hour, the firm should produce more of the mixer and outsource the remaining products.
Options A , B & D is incorrect because it has a high variable cost
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Sanjana
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Original Message:
Sent: 10-12-2020 06:53 AM
From: Tayba Al-Mehdar
Subject: help in understanding the answer CMA part 2 CVP
Fact Pattern: Geary Manufacturing has assembled the data appearing in the next column pertaining to two products. Past experience has shown that the unavoidable fixed manufacturing overhead included in the cost per machine hour averages $10. Geary has a policy of filling all sales orders, even if it means purchasing units from outside suppliers. Total machine capacity is 50,000 hours. | | Electric | | Blender | Mixer | | | | Direct materials | $ 6 | $11 | Direct labor | 4 | 9 | Manufacturing overhead | | | at $16 per hour | 16 | 32 | Cost if purchased from an | | | outside supplier | 20 | 38 | Annual demand (units) | 20,000 | 28,000 |
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Question: 43 | With all other things constant, if Geary Manufacturing is able to reduce the direct materials for an electric mixer to $6 per unit, the company should |
| | | | | | | | Answer (C) is correct. Reducing unit direct materials cost for mixers from $11 to $6 decreases unit variable cost to $27 ($6 DM + $9 DL + $12 VOH) and increases the cost savings of making a mixer from $6 to $11, or $5.50 per hour ($11 ÷ 2 hours per unit). Given a cost savings per hour for blenders of $4, the company can minimize total variable cost by making 25,000 mixers (50,000 hours capacity ÷ 2). Total variable cost will be $1,189,000 [(25,000 mixers × $27) + (3,000 mixers × $38) + (20,000 blenders × $20)]. | | |
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Tayba Al-Mehdar
Analyst
Khobar
Saudi Arabia
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