Accounting 225 Quiz Section #14

Chapter 12-1 Class Exercises Solution

1. Curly Inc. is considering whether to continue to make a component or to buy it from an
outside supplier. The company uses 16,000 of the components each year. The unit product cost
of the component according to the company's cost accounting system is given as follows:

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is
avoidable if the component were bought from the outside supplier. In addition, making the
component uses 1 minute on the machine that is the company's current constraint. If the
component were bought, this machine time would be freed up for use on another product that
requires 2 minutes on the constraining machine and that has a contribution margin of $8.10 per
unit.
a) When deciding whether to make or buy the component, what cost of making the component
should be compared to the price of buying the component?

b) How much will Curly Inc. save or lose by buying the component instead of making it?
Unit Cost Make: $21.57
Unit Cost Buy: $21
Curly Inc. will save 57c per unit if it buys the component.
Or $9120 for 16000 units

Accounting 225 Quiz Section #14

Chapter 12-1 Class Exercises Solution
2. Green Company produces 1,000 parts per year, which are used in the assembly of one of its
products. The unit product cost of these parts is:

The part can be purchased from an outside supplier at $20 per unit. If the part is purchased from
the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The annual
impact on the company's net operating income as a result of buying the part from the outside
supplier would be:

Accounting 225 Quiz Section #14

Chapter 12-1 Class Exercises Solution
3. Part J88 is used in one of Quinney Corporation's products. The company makes 3,000 units of
this part each year. The company's Accounting Department reports the following costs of
producing the part at this level of activity:

An outside supplier has offered to produce this part and sell it to the company for $32.10 each. If
this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor,
can be avoided. The special equipment used to make the part was purchased many years ago and
has no salvage value or other use. The allocated general overhead represents fixed costs of the
entire company. If the outside supplier's offer were accepted, only $3,000 of these allocated
general overhead costs would be avoided.
If management decides to buy part J88 from the outside supplier rather than to continue making
the part, what would be the annual impact on the company's overall net operating income?

Accounting 225 Quiz Section #14

Chapter 12-1 Class Exercises Solution
4. The Clemson Company reported the following results last year for the manufacture and sale of
one of its products known as a Tam.

Clemson Company is trying to determine whether or not to discontinue the manufacture and sale
of Tams. The operating results reported above for last year are expected to continue in the
foreseeable future if the product is not dropped. The fixed manufacturing overhead represents the
costs of production facilities and equipment that the Tam product shares with other products
produced by Clemson. If the Tax product were dropped, there would be no change in the fixed
manufacturing costs of the company.
a) Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of
other product lines. If the company discontinues the Tam product line, the change in annual
operating income (or loss) should be:

b) Assume that discontinuing the Tam product would result in a $120,000 increase in the
contribution margin of other product lines. How many Tams would have to be sold next year for
the company to be as well off as if it just dropped the line and enjoyed the increase in
contribution margin from other products?

Contribution margin per Tam: $390,000 6,500 = $60

Sales of Tams to be as well off as if it dropped Tams: $30,000
units

$60 = 500 + 6,500 = 7,000