A&MIS 5251 Agenda Today HFD Exercise 11-20

A&MIS 5252 HFD 11-20: Decisions Options  Manufacture 10,000 CMCBs only.  Outsource production of 10,000 CMCBs to Minton and produce nothing  Outsource production of 10,000 CMCBs to Minton and produce CB3s

A&MIS 5253 HFD Requirement 1 – Calculate the total expected manufacturing (absorption) cost per unit of making CMCBs in 2004.

A&MIS 5254 HFD Materials, $170 $1,700,000 Direct labor, $45450,000 Variable batch manufacturing cost, $1,500120,000 Avoidable fixed mfg. Cost320,000 Unavoidable fixed mfg. Cost 800,000 Total manufacturing cost$3,390,000 Total units produced 10,000 Per unit mfg. Cost$

A&MIS 5255 HFD Note that we just calculated the per unit absorption cost of the 10,000 units of production. Focusing on unit costs in this environment is always risky because some of the costs are fixed, which means the unit cost depends on the volume of production.

A&MIS 5256 HFD 11-20MAKE BUY Cost of buying$3,000,000 Materials$1,700,000 Direct labor450,000 Variable batch mfg.120,000 Avoidable fixed mfg. 320,000 Total differential costs$2,590,000$3,000,000 Difference in favor of making- total$ 410,000 - per unit$ 41

A&MIS 5257 HFD What is missing from this fact situation—and thus our analysis-- that could be a deal breaker?

A&MIS 5258 HFD Decisions recommendation – all else being equal, “make” the CMCB’s for the time being.

A&MIS 5259 HFD Note that the unavoidable fixed costs are the the same under each option. Thus they do not affect the difference between the options. So your text suggests leaving them out. Can you think of reasons to include these unavoidable fixed costs?

A&MIS HFD Also, note there was no opportunity cost in this problem. If the CMCBs were not produced, there would be no increased production to replace the CMCBs. Therefore there is no opportunity cost to producing them.

A&MIS HFD Requirement 3 – Opportunity cost of using the idle capacity: Differential revenues$2,000,000 Differential expenses 2,150,000 Differential income$(150,000)

A&MIS HFD How do we interpret this situation? The best choice is to make the CMCBs. The company saves $410,000 by making instead of buying the CMCBs and leaving the production capacity idle. There is no opportunity cost to leaving the capacity idle. In fact, the company saves $150,000 over the next best alternative.

A&MIS HFD  Total Alternatives Approach to Analysis

A&MIS HFD (000’s)

A&MIS HFD  Opportunities cost to MAKE-OR- BUY decisions

A&MIS HFD (000’s)

A&MIS HFD 11-20: Problem Issues  Multiple cost drivers: units produced and number of batches required  Avoidable versus unavoidable fixed costs.  Leases and agreements  Major changes required or not