Problem
Koch Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Koch produces a relatively small amount (18,000 units) of the cream and is considering the purchase of the product from an outside supplier for $5.20 each. If Koch purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Koch accountant constructed the following profitability analysis.
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Revenue (18,000 units × $13.0)
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234,000
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Unit-level materials costs (18,000 units × $1.30)
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(23,400)
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Unit-level labor costs (18,000 units × $0.50)
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(9,000)
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Unit-level overhead costs (18,000 × $0.60)
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(10,800)
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Unit-level selling expenses (18,000 × $0.30)
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(5,400)
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Contribution margin
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185,400
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Skin cream production supervisor's salary
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(64,000)
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Allocated portion of facility-level costs
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(12,800)
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Product-level advertising cost
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(45,000)
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Contribution to companywide income
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63,600
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Required:
a. Identify the cost items relevant to the make-or-outsource decision.
b-1. What is the avoidable cost per unit if the outsourcing decision is taken?
b-2. Should Koch continue to make the product or buy it from the supplier?
Make
Buy
c-1. Suppose that Koch is able to increase sales by 10,000 units (sales will increase to 28,000 units). Calculate the total avoidable costs.
c-2. At this level of production, should Koch make or buy the cream?
Make
Buy.