Solution:
- Calculation of the cost per unit of producing the canisters under the traditional approach
|
Particulars |
|
Amount ($) |
|
Direct material |
300,000.00 |
|
|
Direct labour (12,000*15) |
180,000.00 |
|
|
Variable overhead (12,000*10) |
120,000.00 |
|
|
Fixed overhead (12,000*45) |
540,000.00 |
|
|
Total Cost |
|
1,140,000.00 |
|
No. of Units |
760,000.00 |
|
|
Cost per unit |
1.50 |
The cost per unit of producing the canisters under the traditional approach is $ 1.50.
- Calculation of the cost of purchasing the canisters
|
Particulars |
|
Amount ($) |
|
Cost of purchase |
$1 |
|
|
No. of units |
760,000 |
|
|
Total purchase cost |
$760,000 |
|
|
Add: Unavoidable fixed costs (540,000-80,000-28,000) |
$432,000 |
|
|
Total costs |
|
$1,192,000 |
|
Cost per unit |
|
$1.57 |
The cost of purchase is $1.57 whereas the cost to manufacture is $1.50. So, the company should manufacture the canisters.
- Analysis of special offer
|
Particulars |
|
Amount ($) |
|
Direct material (20,000*300,000/760,000) |
7,895 |
|
|
Direct labour (20,000*180,000/760,000) |
4,737 |
|
|
Variable overhead (20,000*120,000/760,000) |
3,158 |
|
|
Total Cost |
15,789 |
|
|
Units |
20,000 |
|
|
Cost per unit |
0.79 |
The offered price for special offer is $1.40 and cost per unit of manufacturing this special offer is $0.79. So, the offer should be accepted.
- Other factors that the firm should consider before deciding whether to accept the order are as below:
- Alternative Options– Company needs to see if any better option available in the market or not. If better option is available, company should go for better alternative and reject this proposal.
- Availability of Raw Material– It is important to consider the sufficient raw material at the existing or lower price in the market before the company accept the order. If sufficient raw material is not available or available at higher price, decision regarding acceptance or rejection may change.
- Availability of Labour– Like material, availability of sufficient labour at the existing or lower price needs to be assured before accepting the project. Usually the labour costs increase with the increase in the demand which may impact the decision.
- Impact on existing business– If the existing customers come to know of this new pricing, then they may also demand the price cut from the company. This will directly impact the profitability of the company. Therefore a confidentiality clause to this effect is better in such cases.
- Increase in indirect staff– There may be possibility to hire a new staff personal take care of this new project. Company should also consider the cost of this new staff and its related costs (recruitment costs, etc.).
- Manufacturing of coffee cup or canisters
Profit from manufacturing coffee cups
|
Particulars |
|
Amount ($) |
|
Direct material |
0.60 |
|
|
Direct labour |
0.20 |
|
|
Variable overhead |
0.10 |
|
|
Fixed overhead |
0.15 |
|
|
Cost per unit |
1.05 |
|
|
Selling Price |
1.20 |
|
|
Profit |
0.15 |
|
|
No. of units |
400,000 |
|
|
Total Profit |
60,000 |
Profit from manufacturing canisters
|
Particulars |
|
Amount ($) |
|
Direct material |
300,000.00 |
|
|
Direct labour (12,000*15) |
180,000.00 |
|
|
Variable overhead (12,000*10) |
120,000.00 |
|
|
Fixed overhead (12,000*45) |
540,000.00 |
|
|
Total Cost |
1,140,000.00 |
|
|
No. of Units |
760,000.00 |
|
|
Cost per unit |
1.50 |
|
|
Selling Price per unit (760,000*0.70) |
2.20 |
|
|
Profit per unit (SP-Cost) |
0.70 |
|
|
Total profit |
532,000.00 |
The profit from manufacturing coffee cups is $60,000 whereas the profit from manufacturing canisters is $ 532,000. So, the company should manufacture canisters.
- Other factors that should be considered whether to manufacture the canisters or purchase them from the outside supplier
- Additional offers available– if there are other manufacturing offers available with the company which can generate more revenues to the company rather than producing canisters, then the company should adopt the other alternatives.
- Make cost or purchase cost– the company needs to access the manufacturing cost and purchase cost. If the canisters are available at a cost lower than the manufacturing cost and the company can avoid fixed costs also. Then the company should go for purchasing them from outside.
- Benefit of opportunity costs– If the company can take the benefit or utilize the costs from non-manufacturing of canisters and can generate additional revenue from these costs. Then the company should go for purchasing the canisters from outside rather manufacturing.
- Customer preferences– If the customer is specific to a product and purchasing the product from outside does not meets the customer requirements, then the company should manufacture the product in house as the customer satisfaction is of utmost priority and maintaining customers are most important.
- Future Plans– Further, the company needs to access its future expansion plans and funding requirements. After considering the financial impacts and future predictions, the company should decide whether to manufacture the product or purchase it.
- Other economic and political benefits– If there are other political or economic benefits are available then the company should go with the option more profitable for the company.
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