Question

5 Make versus buy, activity-based costing. The Svenson Corporation manufactures cellular modems. It manufactures its own cellular modem circuit boards (CMCB), an important part of the cellular modem. It reports the following cost information about the costs of making CMCBs in 2017 and the expected costs in 2018: Current Costs in 2017 Expected Costs in 2018 Variable manufacturing costs Direct material cost per CMCB $ 180 $ 170 Direct manufacturing labor cost per CMCB 50 45 Variable manufacturing cost per batch for setups, materials handling, and quality control 1,600 1,500 Fixed manufacturing cost Fixed manufacturing overhead costs that can be avoided if CMCBs are not made 320,000 320,000 Fixed manufacturing overhead costs of plant depreciation, insurance, and administration that cannot be avoided even if CMCBs are not made 800,000 800,000 Svenson manufactured 8,000 CMCBs in 2017 in 40 batches of 200 each. In 2018, Svenson anticipates needing 10,000 CMCBs. The CMCBs would be produced in 80 batches of 125 each. The Minton Corporation has approached Svenson about supplying CMCBs to Svenson in 2018 at $300 per CMCB on whatever delivery schedule Svenson wants. 1. Calculate the total expected manufacturing cost per unit of making CMCBs in 2018. 2. Suppose the capacity currently used to make CMCBs will become idle if Svenson purchases CMCBs from Minton. On the basis of financial considerations alone, should Svenson make CMCBs or buy them from Minton

Answer 1

Answer:

See below

Explanation:

Expected manufacturing costs 2018:

Direct materials $170 × 10,000 = $1,700,000

Direct labor $45 per unit × 10,000 = $450,000

Variable overhead per batch 1,500 × 80 = $120,000

Fixed overhead:

Avoidable $320,000

Not avoidable $800,000

1. Calculate that total expected manufacturing cost per unit of making CMCBs in 2018

= $1,700,000 + $450,000 + $120,000 + $320,000 + $800,000

= $3,390,000

Cost per unit = $3,390,000/10,000 units

= $339 per unit

2. Svenson should keep manufacturing the CMCBs

Costs if CMCBs are purchased from Minton = ($300 × 10,000) + $800,000

= $3,000,000 + $800,000

= $3,800,000

It means that the cost of purchasing is $410,000 [ $3,390,000 - $3,800,000] higher than the cost of manufacturing.