Question

Q1
WLS Company currently makes a key component for their tractors in house. The costs are as follows:
Per Unit
Direct Materials $ 4.00
Direct Labor             6.00
Allocated Overhead          10.00
Total Cost        $20.00
If the component is purchased from an outside vendor the company will reduce their overhead costs by 80%. What is the maximum purchase price the company should consider to move to an outside vendor without respect to any other issue?
(present calculations for partial credit). Label your answer.

Q2
What issues should be considered when making decisions about outsourcing and eliminating the production of a key sub assembly for products manufactured by a company? Your answer should be presented as a bulleted list.

Q3
What issues should be considered when deciding whether to eliminate a product line? Your answer should discuss the issues of profitability and include the concept of the contribution format income statement as well as the effect on sales for the company.

Q4
Explain how using a predetermined overhead rate can affect profits and losses? That is, why might the predetermined overhead be inaccurate when compared to the actual results of the activities affected by the predetermined overhead rate? Your answer should begin by explaining how a predetermined overhead rate is calculated and conclude with why there would be variances from the original estimated values in the calculation (do not discuss any variables except those directly related to the predetermined overhead rate calculation).

Q5
Explain the rationale for the starting point for a manufacturing company’s budget? That is, what is the first budget and why is that important? How does it affect all remaining budgets?

Q6
When considering how much of a product to produce or acquire for the period, describe the specific items you would use in the calculation? Your answer should be based on the budget chapter as well as on the basic formula related to inventory, discussed at various points throughout our class.

Q7
Explain the high low method including its calculation and the cost formula for total cost. Your answer should include how it is calculated, what purpose it serves, and what issues may arise regarding the accuracy of the resulting conclusion regarding costs.

Solution Preview

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The maximum purchase price to be considered is simply equal to the incremental costs the company will incur should it choose to produce the component themselves.
It is equal to the sum of direct materials, direct labor and variable overhead costs, which is 80% of the allocated $10 overhead cost.
Maximum Purchase Price = 4 + 6 + 8 = 18
...

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