Accounting Business Reporting for Decision Making

CHAPTER 10 Cost–volume–profit analysis 457

$40 000 would therefore need to be purchased by Crystal Lattice. The machine could not be used

for other products.

Required

a. From a financial perspective, should Crystal Lattice accept the special order? Show calculations.

b. Would you recommend accepting the order if Crystal Lattice was currently operating at 95 per

cent capacity? Show calculations.

c. What other factors should be considered before the order is accepted?

10.51 Outsource computations, qualitative factors   LO9

Diamond Light Company incurred the following costs to produce 50 000 light switches for floor

lamps in 2017.

Direct materials

Direct labour

Variable manufacturing overhead

Fixed manufacturing overhead

$ 100 000

150 000

80 000

120 000

Total manufacturing costs $ 450 000

The Ignition Company has offered to supply the switches for $16 per unit. An analysis of the

overhead costs has identified that if the switches are outsourced, Diamond Light Company would

eliminate $20 000 of fixed costs, and could use the released production capacity to generate

additional income of $56 000 from producing a different product.

Required

a. From a financial perspective, should the light switches be outsourced? Show calculations.

b. What qualitative factors need to be considered in the outsourcing decision?

10.52 Outsourcing (make or buy)    LO9

The management of SouthPak Company (SouthPak) has asked for your assistance in deciding

whether to continue manufacturing a part or to buy it from an outside supplier. The part, called

Alpha B, is a component of SouthPak’s finished product. An analysis of the accounting records

and the production data revealed the following information for the year ending June 2017.

1. The production department produced 70 000 units of Alpha B.


2. Six employees are assigned to the production department and work full-time (1920 hours each
   per year) producing Alpha B. Each employee is paid $20 per hour.


3. The cost of materials per Alpha B unit is $4.


4. Manufacturing costs directly applicable to the production of Alpha B are as follows.

Indirect labour

Utilities

Depreciation

Rates and insurance

$15 000

3 000

3 600

2 000

All of the above costs will be eliminated if Alpha B is purchased.

5. The lowest price for Alpha B from an outside supplier is $8 per unit. Delivery costs will be
   $0.80 per unit, and a part-time dispatch employee at $17 000 per year will be required.


6. If Alpha B is purchased, the excess space will be used to store SouthPak’s finished product.
   Currently, SouthPak rents storage space at approximately $1.60 per unit stored per year.
   Approximately 9000 units per year are stored in the rented space.
   Required
   Should SouthPak make or buy the part? Show all calculations.

10.53 Outsourcing computations, uncertainties    LO9

Saguaro Systems produces and sells speakers and CD players. The following information about

the costs related to the systems has been collected.