Agenda Today
HFD Exercise 11-20
A&MIS 525
1
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 525
2
HFD 11-20
Requirement 1 –
Calculate the total expected
manufacturing (absorption) cost per unit
of making CMCBs in 2004.
A&MIS 525
3
HFD 11-20
Materials, 10,000 @ $170
$1,700,000
Direct labor, 10,000 @ $45
450,000
Variable batch manufacturing
cost, 80 @ $1,500
120,000
Avoidable fixed mfg. Cost
320,000
Unavoidable fixed mfg. Cost
800,000
Total manufacturing cost
$3,390,000
Total units produced
10,000
Per unit mfg. Cost
$ 339.00
A&MIS 525
4
HFD 11-20
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 525
5
HFD 11-20
MAKE
Cost of buying
Materials
Direct labor
Variable batch mfg.
Avoidable fixed mfg.
Total differential costs
Difference in favor of
making- total
- per unit
BUY
$3,000,000
$1,700,000
450,000
120,000
320,000
$2,590,000 $3,000,000
$ 410,000
$ 41
A&MIS 525
6
HFD 11-20
What is missing from this fact
situation—and thus our analysis-that could be a deal breaker?
A&MIS 525
7
HFD 11-20
Decisions recommendation – all else
being equal, “make” the CMCB’s
for the time being.
A&MIS 525
8
HFD 11-20
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 525
9
HFD 11-20
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 525
10
HFD 11-20
3. 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 525
11
HFD 11-20
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 525
12
HFD 11-20
 Total Alternatives Approach to
Analysis
A&MIS 525
13
HFD 11-20 (000’s)
Make
CMCBs Buy CMCBs Buy CMCBs
Only
No CB3s Make CB3s
Differential
Cost of
CMCBs
Net cost
of CB3s
Total relevant
costs
$ 2,590 $
$ 2,590 $
A&MIS 525
3,000 $
3,000 $
3,000
150
3,150
14
HFD 11-20
 Opportunities cost to MAKE-ORBUY decisions
A&MIS 525
15
HFD 11-20 (000’s)
Make
CMCBs Buy CMCBs Buy CMCBs
Only
No CB3s Make CB3s
Differential
Cost of
CMCBs
$ 2,590 $
Opporunity
cost
Total relevant
costs
$ 2,590 $
A&MIS 525
3,000 $
3,000 $
3,000
150
3,150
16
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
A&MIS 525
17