# Math Question

1.ZING Company produces a small part that it uses in the production of its Product “H”. The company’s unit product cost for the part, based on a production of 100,000

parts per year, is as follows:

………………………………………….Per part ………………..Total
Direct Materials………………………. \$7.00………..\$700,000
Direct Labor …………………………….6.00…………\$600,000

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Fixed manufacturing Overhead, (Traceable or avoidable as if it were per unit 4.00 ) \$400,000 TOTAL

Fixed manufacturing Overhead,( Common—not traceable to any product. Will stay even if no product is manufactured)
allocated on basis of labor-hours 5.00) \$500,000

Unit Product Cost……………………… \$24.00 (7+ 6+ 2 + 4+ 5= 24)

An outside supplier has offered to supply parts to the  Company for only \$21.25 per part.(it appears to the President of the company that he could save \$2.75 per unit; but the President has not taken a Managerial Accounting course and he does not understand fixed costs and variable costs like you do.)

100 percent of the traceable fixed manufacturing cost is supervisor salaries and other costs that can be ELIMINATED if the parts are purchased. The decision to buy the parts from the outside supplier would have no effect on the common fixed costs of the company, and the space being used to produce the parts would otherwise be idle.

Ignore the impact of income taxes in your calculation.
A) How much would profits increase or decrease as a result of purchasing the parts from the
outside supplier rather than making them inside the company???

Help:
Set up columns for “MAKE” and “BUY”. Under MAKE we have 100,000 units costing \$24 per unit for a total of \$2,400,000. Then calculate what the TOTAL costs would be if we BUY the product. Note that it will be more than just \$21.25 x 100,000.

B) (This part is a bit more difficult.) If we need 150,000 Units– How much would profits increase or decrease as a result of purchasing the parts from the outside supplier rather than making them inside the company? (You need to carefully set up columns for Make and Buy

2.Shanes Company is launching a new line of product. The company invests \$4,000,000 in operating assets, such as production equipment, and plans to produce and sell 400,000 units per year.
Shanes wants to make a return on investment of 25% each year.

Shanes needs to know what price to charge for this product.

Use the absorption costing approach to determine the markup necessary make the desired return on investment.

Cost information is provided below.

REQUIRED: CALCULATE THE SELLING PRICE.

Per Unit cost:
Direct Materials \$30.00
Direct Labor \$ 8.00