ACC202 Financial and Accounting Management
(a) The Playdough company has been approached to manufacture special coffee cups .This would have the following costs per unit :
Direct material $ 0.60
Direct labour 0.20
Variable overhead 0.10
Fixed overhead 0.15
The coffee cups would then be sold for $1.20 per coffee cup .It could manufacture and sell 400,000 of these coffee cups .Should.the Playdough company purchase the canisters from the Canister company and start manufacturing coffee cups or continue manufacturing canisters? Show workings.
(b) Are there any other factors which should be considered in deciding whether to manufacture the canisters or purchase them from the outside supplier?
Answer:
Que a)
If Play Dough Company would manufacture the coffee cups than the following cost could be occurred:
|
Direct Material |
$ 0.60 |
|
Direct labour |
$ 0.20 |
|
Variable overhead |
$ 0.10 |
|
Fixed overhead |
$ 0.15 |
Further, the sales price and the units of the coffee cups are given below:
|
Sales units |
400000 |
|
Selling Price |
$ 1.20 |
Through the given information, it has been found that is the company would manufacture the coffee cups than the following cost would be occurred:
|
Per unit |
Total | ||
|
Purchase price | |||
|
Direct Material |
$ 0.60 |
$ 2,40,000.00 | |
|
Direct Labour |
$ 0.20 |
$ 80,000.00 | |
|
Variable OH |
$ 0.10 |
$ 40,000.00 | |
|
relevant Fixed OH |
$ 0.15 |
$ 60,000.00 | |
|
Total Relevant cost |
1.05 |
$ 4,20,000.00 | |
Further, it has been found that if the company would manufacture than the following profit would be earned by the company:
|
Calculation of Total profit | ||
|
Per unit |
Total | |
|
Total Revenue |
$ 1.20 |
$ 4,80,000.00 |
|
Total cost |
$ 1.05 |
$ 4,20,000.00 |
|
Profit |
$ 0.15 |
$ 60,000.00 |
Whereas if the company would be bought canisters from the canister company than the total profit of the company would be $ 53200 and if the canisters would be manufactured by the company than the total profit of the company would be less. At the same time, in above case the profit of the company would be $60000. So company must go for the new proposal as this would offer the highest profit to the company.
Que b)
Manufacture the product or buy the product from suppliers is a huge decision. This decision is affected through many factors such as capacity of the plant, economical condition, production, demand and supply of the product etc. these factors affect the decision of the buying or manufacturing decision of the company. Some of the factors are below which affects the make or buy decision of a company:
- Volume of production
- Utilization of production capacity
- Availability of manpower
- Integration of production capacity
- Quality and reliability of vendors
- Protection of patent right
- Technological aspects
- Strategic aspects etc.
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