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Avoidable costs if purchased

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Pratt Witney Company manufactures a part used in several of its engine models. Annual production costs for 1,500 units are as follows:

Direct materials $ 125,000
Direct labor 48,000
Variable support costs 75,000
Fixed support costs 65,000
Total costs $313,000

Pratt Witney Company has the option of purchasing the part from a General Electric at $167.50 per unit. It is estimated that 25% of the fixed support costs assigned to this part will no longer be incurred if the company purchases the part from GE.

2.1 If Pratt Witney Company accepts the offer from GE, the annual avoidable costs (costs that will no longer be incurred) total:

_________________________________

2.2 If Pratt Witney Company purchases 1,500 parts from GE per year, and then its operating income will:

Increase by _____________________ OR decrease by ___________________________

2.3 The maximum price that Pratt Witney Company should be willing to pay GE for each unit of this part is:

_________________________________

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Solution Preview

Pratt Witney Company manufactures a part used in several of its engine models. Annual production costs for 1,500 units are as follows:

Direct materials $ 125,000
Direct labor 48,000
Variable support costs 75,000
Fixed support costs 65,000
Total costs $313,000
Pratt Witney Company has the option of purchasing the part from a General Electric at $167.50 per unit. It is ...

Solution Summary

The solution explains the effect on income if the parts are purchased instead of making.

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Management Accounting

Pls. read the attached file (The Minnetonka Corporation) and answer the following questions (The answers without considering the specific steps are also attached as "incomplete answers"):
* Pls. note that the "incomplete answers" are correct answers. I need more detailed answers following the steps. Thank you.

1. Should the Minnetonka Corporation make or buy the bindings? Show calculations to support your answer and you must follow the steps to answer:

What is cost of making bindings internally?
STEPS
a. Separate the cost of making skis and making bindings.

Components are Material, Labor, Overhead.
Example: Material: $30 total * 20% for bindings = $ 6.00 for material for pair of bindings.
Do for Material, Labor, Variable Overhead. Total is avoidable cost to make bindings at Minnetonka.

b. Overhead: Total (variable and fixed) is $15 per pair. You have to figure out the Fixed overhead per unit ($100,000 total) and then take that out of the $15 so you are left with only variable. You are only concerned with the VARIABLE part of the overhead (as this the avoidable cost for not making the bindings).

c. Total the Material, Labor, Overhead variable costs per unit.

2. What would be the maximum purchase price acceptable to the Minnetonka Corporation for the bindings? Support your answer with an appropriate explanation and you must follow the steps to answer:

What is cost of making bindings internally?
STEPS
a. Separate the cost of making skis and making bindings.

Components are Material, Labor, Overhead.
Example: Material: $30 total * 20% for bindings = $ 6.00 for material for pair of bindings.
Do for Material, Labor, Variable Overhead. Total is avoidable cost to make bindings at Minnetonka.

b. Overhead: Total (variable and fixed) is $15 per pair. You have to figure out the Fixed overhead per unit ($100,000 total) and then take that out of the $15 so you are left with only variable. You are only concerned with the VARIABLE part of the overhead (as this the avoidable cost for not making the bindings).

c. Total the Material, Labor, Overhead variable costs per unit.

3. Instead of sales of 10,000 pair of skis, revised estimates show sales volume at 12,500 pair. At this new volume, additional equipment, at an annual rental of $10,000 must be acquired to manufacture the bindings. This incremental cost would be the only additional fixed cost required even if sales increased to 30,000 pair. (This 30,000 level is the goal for the third year of production.) Under these circumstances, should the Minnetonka Corporation make or buy the bindings? Show calculations to support your answer. You must follow the steps to answer:

At a volume of 12,500 pair, should Minnetonka buy the bindings?
STEPS
a. Compute total $ cost of making (per unit variable plus fixed overhead) for 12,500 pair.

b. Compute total $ cost of buying the bindings.

c. Compare the two.

d. Figure the units where making is better than buying (you could use algebra or just trial and error to find the point where it is cheaper to make vs. buy).

4. What nonquantifiable factors should the Minnetonka Corporation consider in determining whether they should make or buy the bindings? you must follow the steps to answer:

There are many nonquantifiable factors that Minnetonka should consider in addition to the economic factors calculated above.
STEPS
List 2 to 3 factors.
- Describe each performance system.
- Compare and contrast them.
- Bullet points and a table of compare and contrast.

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