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Week10 Tutorial Question Solution.docx

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Department
Administrative Studies
Course
ADMS 2510
Professor
Li Zha Ma
Semester
Winter

Description
Exercise 12­16 (20 minutes) The costs that are relevant in a make­or­buy decision are those costs that can be avoided  as a result of purchasing from the outside. The analysis for this exercise is: Per Unit  Differential  Costs 20,000 Units Make Buy Make Buy Cost of purchasing..................................... $23.50 $470,000 Cost of making: Direct materials....................................... $ 4.80 $ 96,000 Direct labour........................................... 7.00 140,000 Variable manufacturing overhead........... 3.20 64,000 Fixed manufacturing overhead...............    4.00   *            80,000               Total cost...............................................$19.00 $23.50 $380,000 $470,000 * The remaining $6 of fixed manufacturing overhead cost would not be relevant,  since it will continue regardless of whether the company makes or buys the  parts. The $150,000 rental value of the space being used to produce part R­3 represents an  opportunity cost of continuing to produce the part internally. Thus, the completed analysis  would be: Make Buy Total cost, as above............................................................... $380,000 $470,000 Rental value of the space (opportunity cost)..........................  150,000              Total cost, including opportunity cost..................................... $530,000 $470,000 Net advantage in favour of buying.......................................... $60,000 Profits would increase by $60,000 if the outside supplier’s offer is accepted. Problem 12­19 (45 minutes) 1. The simplest approach to the solution is: Gross margin lost if the store is closed....................... $(228,000) Less costs that can be avoided: Direct advertising..................................................... $36,000 Sales salaries.......................................................... 45,000 Delivery salaries......................................
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