Question Description

I’m working on a accounting report and need support to help me learn.

Question 1: Relevant Cost/Special Order

Gottshall Inc. makes a range of products. The company’s predetermined overhead rate is $19 per direct labor-hour, which was calculated using the following budgeted data:

Variable manufacturing overhead …….

$225,000

Fixed manufacturing overhead …………

$630,000

Direct labor-hours …………………………..

45,000

Component P0 is used in one of the company’s products. The unit cost of the component according to the company’s cost accounting system is determined as follows:

Direct materials …………………………………..

$21.00

Direct labor …………………………………………

40.80

Manufacturing overhead applied ……………

32.30

Unit product cost …………………………………

$94.10

An outside supplier has offered to supply component P0 for $78 each. The outside supplier is known for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision. Gottshall chronically has idle capacity.

Required:

Is the offer from the outside supplier financially attractive? Why?

Question 2: Relevant Cost/Make or Buy Decision

Part U67 is used in one of Broce Corporation’s products. The company’s Accounting Department reports the following costs of producing the 7,000 units of the part that are needed every year.

Per Unit

Direct materials ……………………………………

$8.70

Direct labor …………………………………………

$2.70

Variable overhead ………………………………..

$3.30

Supervisor’s salary ……………………………….

$1.90

Depreciation of special equipment …………

$1.80

Allocated general overhead……………………

$5.50

An outside supplier has offered to make the part and sell it to the company for $21.40 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier’s offer were accepted, only $6,000 of these allocated general overhead costs would be avoided.

Required:

a. Prepare a report that shows the effect on the company’s total net operating income of buying part U67 from the supplier rather than continuing to make it inside the company.

b. Which alternative should the company choose?

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