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This is a comparison between the cost to manufacture versus the cost to purchase outside. Since the revenue to be received and the $1,600,000 fixed manufacturing costs will be the same regardless of the decision that is made, those factors are irrelevant to this decision, as is the contribution margin to be earned with each alternative. We need to find the least cost alternative for acquiring or producing this order. If Lark chooses this alternative, its total variable cost for the order will be $1,971,000, as follows: 25,000 units of A × 3 hours per unit = 75,000 hours, leaving 85,000 hours (160,000 hours ? 75,000 hours) available, which could be used to manufacture 17,000 units of B (85,000 hours ÷ 5 hours per unit). The total variable cost of the products manufactured will be (25,000 × $30) + (17,000 × $48) = $1,566,000. Outsourced units will be 5,000 units of A at a cost of $45 per unit and 3,000 units of B at a cost of $60 per unit, or (5,000 × $45) + (3,000 × $60) = $405,000. Total variable cost will be $1,566,000 + $405,000 = $1,971,000. This is not the lowest-cost alternative. Please see the correct answer choice for a full explanation of the process of making this decision.
This is a comparison between the cost to manufacture versus the cost to purchase outside. Since the revenue to be received and the $1,600,000 fixed manufacturing costs will be the same regardless of the decision that is made, those factors are irrelevant to this decision, as is the contribution margin to be earned with each alternative. We need to find the least cost alternative for acquiring or producing this order. If Lark chooses this alternative, its total variable cost for the order will be $2,010,000, as follows: 20,000 units of A × 3 hours per unit = 60,000 hours, leaving 100,000 hours (160,000 hours ? 60,000 hours) available, which could be used to manufacture all 20,000 units of B required (100,000 hours ÷ 5 hours per unit). The total variable cost of the products manufactured will be (20,000 × $30) + (20,000 × $48) = $1,560,000. Outsourced units will be 10,000 units of A at a cost of $45 per unit, or $450,000. Total variable cost will be $1,560,000 + $450,000 = $2,010,000. This is not the lowest-cost alternative. Please see the correct answer choice for a full explanation of the process of making this decision.
This is a comparison between the cost to manufacture versus the cost to purchase outside. The revenue to be received and the $1,600,000 of fixed overhead will be the same whether the product is manufactured or outsourced, so those factors are irrelevant to this decision, as is the contribution margin to be earned with each alternative. We need to find the least cost alternative for acquiring or producing this order. We can narrow the choices by comparing the cost per machine hour required to manufacture the products with the cost to outsource per machine hour that would be required if manufactured. Product A: The cost per machine hour required if manufactured is: $30 ÷ 3 hours = $10 The cost to outsource per machine hour required if manufactured is: $45 ÷ 3 hours = $15 The difference is $5 less per machine hour to manufacture. Product B: The cost per machine hour required if manufactured is: $48 ÷ 5 hours = $9.60 The cost to outsource per machine hour required if manufactured is: $60 ÷ 5 hours = $12 The difference is $2.40 less per machine hour to manufacture. Since the cost per machine hour is $5 lower to manufacture Product A than to buy Product A while the cost per machine hour is only $2.40 lower to manufacture Product B than to buy Product B, the company should utilize its limited facilities to make as much as possible of Product A, first. The amount needed of Product A is 30,000 units, and those will require 3 hours each, or 90,000 hours. That is well within the maximum number of machine hours available, so the company should make all the units needed of Product A. That rules out the answer choices that call for making only 25,000 and 20,000 units of A. However, we still need to decide between renting the necessary capacity to manufacture the whole amount, or making 30,000 units of A and as many units as possible of B and outsourcing the remainder. To do that, we need to make a cost comparison of the incremental costs of each answer choice. Rent additional capacity of 30,000 machine hours which will increase fixed costs by $150,000: The total variable and incremental fixed cost would be ($30 × 30,000) + ($48 × 20,000) + $150,000 = $2,010,000. Make 30,000 units of Product A, utilize the remaining capacity to make Product B, and outsource the remainder: With 160,000 machine hours available, the company can use 90,000 of those hours to manufacture all of the 30,000 units needed of Product A (30,000 × 3 hours per unit). With the 70,000 remaining machine hours, they can manufacture 14,000 units of Product B (70,000 ÷ 5 hours per unit). The remaining 6,000 united needed of Product B would be outsourced. The total variable cost would be ($30 × 30,000) + ($48 × 14,000) + ($60 × 6,000) = $1,932,000. Therefore, the least cost alternative is to make 30,000 units of Product A, utilize the remaining capacity to make Product B, and outsource the remainder.
This is a comparison between the cost to manufacture versus the cost to purchase outside. Since the revenue to be received and the $1,600,000 fixed manufacturing costs will be the same regardless of the decision that is made, those factors are irrelevant to this decision, as is the contribution margin to be earned with each alternative. We need to find the least cost alternative for acquiring or producing this order. If Lark chooses this alternative, the company will be able to manufacture the whole order in-house. Its total variable and incremental fixed cost for the order will be $2,010,000, as follows: The total variable cost of the products manufactured will be (30,000 × $30) + (20,000 × $48) = $1,860,000. Incremental fixed cost for the rented capacity will be $150,000. Total variable and incremental fixed cost will be $1,860,000 + $150,000 = $2,010,000. This is not the lowest-cost alternative. Please see the correct answer choice for a full explanation of the process of making this decision.