What is the relevant cost of making the crowns

Question

Part 1: Relevant Costing

You have been asked to determine whether it is advisable to purchase metal pieces used in the manufacturing of leather furniture from an outside source, or to make them internally which is the current practice.

Indicate whether each of the following factors would be relevant or irrelevant to your decision:

1. The original cost of equipment currently used to make the metal pieces.
2. The cost of buying metal pieces from suppliers.
3. The space freed up if metal pieces are not made internally.
4. The salary of the president of the Furniture Company.
5. The quality of the metal pieces made internally.
6. Depreciation on equipment used to make the metal pieces.
7. The labor contract with production workers.
8. The selling prices of the furniture pieces.

Part 2: Make or Buy Decision

Whites Dentistry Services operates in a large metropolitan area. Whites has its own dental laboratory to produce porcelain and gold crowns. The per unit cost to produce the crowns are as follows:

	Porcelain	Gold
Raw Materials	$60	$60
Direct Labor	25	40
Variable Overhead	10	15
Total	$95	$115

 

Fixed Overhead is made up of the following items; Salary of lab supervisor $55,000, Equipment Depreciation $40,000, and Rent on the lab facility $30,000.

A local dental laboratory has offered to supply Whites all the crowns it needs. Its price is $110 for porcelain crowns and $165 for gold crowns; however, the offer is conditional on supplying both types of crowns-it will not supply just one type for the price indicated. If the offer is accepted, the equipment used by Whites laboratory would be scrapped (it is old and has no market value), and the lab facility would be closed. Whites uses 2,500 porcelain crowns and 1,500 gold crowns per year.

List all the items individually that make up the relevant cost, then total each option and compute the differential.

1. What is the relevant cost of making the crowns?
2. What is the relevant cost of buying the crowns?
3. Which alternative is more cost effective and by how much?

Part 3: Special Order Decision

Clark Company produces a light fixture with the following unit cost:

Direct Materials	$4
Direct Labor	6
Variable Overhead	1
Fixed Overhead	4
Total Unit Cost	$15

The production capacity is 500,000 units per year. Because of a depressed housing market, the company expects to produce only 320,000 fixtures for the coming year. The company also has fixed selling costs totaling $550,000 per year and variable selling cost of $2 per unit sold. The fixtures normally sells for $18 each.

At the beginning of the year, a customer from a geographic region outside the area normally served by the company offered to buy 125,000 fixtures for $12 each. The customer also offered to pay all transportation costs. Since there would be no sales commissions involved, this order would not have any variable selling costs. However, the company would like their own logo added to the fixtures. In order to do this, Clark Company will have to lease a special machine for 4 months (the time it will take to make the order) at a cost of $12,000 per month.

List all the items that make up the relevant costs & benefits individually, then total each option and compute the differential.

1. Does Clark Company have excess capacity? If so, by how much?
2. What are the relevant costs & benefits of accepting & rejecting the order?
3. What are the irrelevant costs & benefits of this situation?
4. Which alternative provides the greatest benefit and by how much?