CMA Study Group

Section C

  • 1.  Section C

    Posted 06-04-2020 05:22 AM

    Refrigerator Company manufactures ice-makers for installation in refrigerators. The costs per unit, for 20,000 units of ice-makers, are as follows.

    Direct materials$ 7
    Direct labor12
    Variable overhead5
    Fixed overhead10
      Total costs$34

    Cool Compartments Inc. has offered to sell 20,000 ice-makers to Refrigerator Company for $28 per unit. If Refrigerator accepts Cool Compartments' offer, the facilities used to manufacture ice-makers could be used to produce 20,000 water filtration units. Revenues from the sale of water filtration units are estimated at $80,000, with variable costs equal to 60% of sales. In addition, $6 per unit of the fixed overhead associated with the manufacture of ice-makers could be eliminated.

    What are the relevant costs involved for Refrigerator Company to make the ice-makers internally or to buy them externally from Cool Compartments, Inc.?

    The answer for this question in the Wiley test bank is $632,000 vs. $560,000.

    In the CMA exam support package, the answer is $600,000 vs. $528,000.

    Which approach is right? Should the contribution received from the water filters be included as a relevant cost to make or buy? 

    Thank you!

  • 2.  RE: Section C

    Posted 06-05-2020 02:58 AM
    Dear Shri Gowri

    I worked out the below and it aligns with the answer provided by Wiley's. I am happy to stand corrected on my approach by learned members of the group though

    DM $7  
    DL  $                 12 Relevant Cost
    VOH  $                   5 Relevant Cost
    Total VC  $                 24  
    FC  $                   6 Relevant Cost (Rs 4 goes for alternative usage)
    Total Unit Cost  $                 30  
    Produc Cost in $  $        600,000  
    Add Opp Cost of  VC  $          32,000 (Rev*(1-60%), Rev being 80000 USD
       $       632,000  
    Cost/ Unit  $                 24 Relevant cost
    DL  $                  -   Irrelevant
    VOH  $                  -   Irrelevant
    Total VC  $                  -   Irrelevant
    FC (excess cap utilised for Filteration Unit)  $                   4 (10-6), will still be incurring, relevant
    Buying Cost  $        480,000 ($24X 20000 Units)
    FC Still will be incurred (Add)  $          80,000 ($4X 20000 Units)
       $       560,000  

  • 3.  RE: Section C

    Posted 26 days ago
    Make : Variable cost = $24 , Total VC= $24* 20000= $480,000
    Avoidable Fixed Cost = $6*20000=$1,20,000
    So Make= $480,000 +$1,20,000= $600,000

    Buy: $28*20000=$560,000
     Revenue from water Filtration = $80,000*60%= $32,000
    Buy= $560,000-$32,000= $528,000

    Anirban Pramanik

  • 4.  RE: Section C

    Posted 26 days ago
    The answer of CMA exam support package is correct.

    Make: I think Srirama's approach is wrong. He/She is including revenue from water filtration units under the calculation of Make - He/She is forgetting that the company cannot make the water filtration units if the company is manufacturing ice-makers internally. So the addition of $32,000 in the schedule is wrong. SO $600,000 is the answer of relevant costs if the company make the ice-makers internally.

    Buy: Not sure why he/she has taken $24 per units, when it is specifiaclly given that the company need to pay $28 for the product to be bought from Cool Compartments. I understand that $24 is the maximum price the company can afford to pay based on the current relevant costs of the company. And 32000 is the revenue generated from selling water filtration units IF when the company uses the idle capacity to manufacture water filtration units. So, 28*20,000-32000(revenue) = 528000.

    So, 600,000 vs 528000 is the right answer. It took me a while to calculate it though.

    Nupur Mahajan
    Hartford CT United States