CMA Study Group

PART 2 - Pricing

  • 1.  PART 2 - Pricing

    Posted 16 days ago
    I am confused with the options in answers

    Question: 28 A manufacturer produces hacksaw blades. Recently, the manufacturer has decided to enhance its product line and offer band blades. Two alternatives are being analyzed: purchase band blades overseas or produce them in-house. If the band blades are made in-house, the manufacturer will not be able to produce hacksaw blades, forgoing a $30,000 profit contribution.
    Revenue from sale of band blades
    Outside purchase
    Direct material and labor
    Variable manufacturing overhead
    Avoidable fixed manufacturing overhead
    Calculate the incremental cost of making and purchasing band blades, respectively.
    Answer (B) is correct.
    The incremental cost of making the band blades is $190,000 ($100,000 direct material and labor + $50,000 variable manufacturing overhead + $10,000 avoidable fixed manufacturing overhead + $30,000 forgone profit contribution). The incremental cost of purchasing the band blades is the $170,000 outside purchase cost.
    Shouldn't the option be  $190,000 and $140,000? since the cost of purchasing comes down by CM 30,000 earned on another product produced?

    Shilpa Sinha

  • 2.  RE: PART 2 - Pricing

    Posted 15 days ago
    If the manufacturer makes the blades it costs them 160,000, plus the  30,000 they lose because they can't make the hacksaw blades. It only costs them $170,000 to purchase them from the overseas manufacturer. so the answer is $190,000, $170,000.

    Judi Aldridge
    Philadelphia PA
    United States

  • 3.  RE: PART 2 - Pricing

    Posted 15 days ago
    Thanks, Judy

    I figured later that there is no opportunity cost for the purchasing option so the incremental cost is only purchasing cost.

    Shilpa Sinha

  • 4.  RE: PART 2 - Pricing

    Posted 11 days ago
    Is there any possibility of $160000 and $140000 ?

  • 5.  RE: PART 2 - Pricing

    Posted 15 days ago
    no here it means that if band blades are produced,manufacturer could not then produce hacksaw blades ,which he already do . in case of lack of excess capacity .cost to make = direct cost of production + any contribution lost from using that capacity .
    while purchase cost will be only their purchase price or any unavoidable cost ,which is not given in this case