One of the materials used in the production of Zets is obtained from a foreign supplier. Civil unrest in the supplier?s country has caused a cutoff in material shipments that is expected to last for three months. Barker Company has enough material on hand to operate at 25% of normal levels for the three-month period. As an alternative, the company could close the plant down entirely for the three months. Closing the plant would reduce fixed manufacturing overhead costs by 35% during the three-month period and the fixed selling expenses would continue at two-thirds of their normal level. What would be the impact on profits of closing the plant for the three-month period?
Contribution margin lost:
Fixed manufacturing Overhead cost:
Fixed selling cost:
Net disadvantage of closing the plant:
The company has 400 Zets on hand that were produced last month and have small blemishes. Due to the blemishes, it will be impossible to sell these units at the normal price. If the company wishes to sell them through regular distribution channels, what unit cost figure is relevant for setting a minimum selling price?
Relevant unit cost:
An outside manufacturer has offered to produce Zets and ship them directly to Barkers customers. If Barker Company accepts this offer, the facilities that it uses to produce Zets would be idle; however, fixed manufacturing overhead costs would continue at 30%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be reduced by 60%. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer.
Variable production costs:
Fixed manufacturing overhead cost:
Variable selling expense:
Total avoidable cost: