Question

Problem 13-25 Effects of the level of production on an outsourcing decision LO 13-3

Walton Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Walton produces a relatively small amount (16,000 units) of the cream and is considering the purchase of the product from an outside supplier for $6.00 each. If Walton purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Walton’s accountant constructed the following profitability analysis:

Revenue (16,000 units x $12)	$192,000
Unit-level material costs (16,000 units x $1.50)	(24,000)
Unit-level labor costs (16,000 units x $0.80)	(12,800)
Unit-level overhead costs (16,000 x $0.30)	(4,800)
Unit-level selling expenses (16,000 x $0.50)	(8,000)
Contribution margin	142,000
Skin cream production supervisor's salary	(62,000)
Allocated portion of facility-level costs	(13,500)
Product-level advertising cost	(49,000)
Contribution to companywide income	$17,900

Required

1. Identify the cost items relevant to the make-or-outsource decision.

2. What is the avoidable cost per unit if the outsourcing decision is taken? Should Walton continue to make the product or buy it from the supplier?

3. Suppose that Walton is able to increase sales by 16,000 units (sales will increase to 32,000 units). Calculate the total avoidable costs. At this level of production, should Walton make or buy the cream?

• Required A

Identify the cost items relevant to the make-or-outsource decision.

Total avoidable costs

• Required B

What is the avoidable cost per unit if the outsourcing decision is taken? Should Walton continue to make the product or buy it from the supplier? (Round your answer to 2 decimal places.)

Total avoidable costs		per unit
Should Walton continue to make the product or buy it from the supplier?		Buy or Make

• Required C

Suppose that Walton is able to increase sales by 10,000 units (sales will increase to 32,000 units). Calculate the total avoidable costs. At this level of production, should Walton make or buy the cream?

Total avoidable costs
At this level of production, should Walton make or buy the cream?	Buy or Make

Answer 1