1. Company currently has the capacity to manufacture 250,000
widgets a year and 100,000 gadgets a year in its factory. Company
has the following costs related to manufacturing and selling
200,000 widgets:
|
|
Scenario 1
|
Scenario 2
|
- Direct materials and direct labor
|
$840,000
|
|
|
- Variable manufacturing overhead
|
$180,000
|
|
|
- Rent on equipment only used for the widgets
|
$40,000
|
|
|
- Allocated share of depreciation on factory
|
$100,000
|
|
|
- Annual salary of widget production manager
|
$70,000
|
|
|
- Variable selling costs (commissions)
|
$60,000
|
|
|
- Allocated share of fixed selling costs
|
$80,000
|
|
|
Total
|
$1,370,000
|
|
|
- Scenario 1: Assume Firm asks Company to
manufacture a special order of 4,000 widgets. Indicate in the
column labeled ‘Scenario 1’ whether each cost is relevant (R) or
not relevant (NR) for this special order decision.
- Scenario 2: Assume Company is considering
outsourcing production of the widget product line. They would
purchase the widgets from a supplier. The widget production manager
will be laid off. Sales of the widget are expected to stay at
200,000 units. Indicate in the column labeled ‘Scenario 2’ whether
each cost is relevant (R) or not relevant (NR) for making the
decision to outsource the widget production.