Cost Analysis for Canister Production

This assignment analyzes the cost implications of producing canisters versus purchasing them from an external supplier. It examines direct and indirect costs, calculates profit margins, and considers factors like opportunity costs, expertise, quality, and reliability when making a production decision. Additionally, it compares the profitability of manufacturing coffee cups against canisters.

Solution:
(a) Calculation of the cost per unit of producing the canisters under the traditional approach
The cost per unit of producing the canisters under the traditional approach is $ 1.50, calculated as below:
Particulars Reference Calculation Amount ($)
Direct material 300,000.00
Direct labour (12,000*15) 180,000.00
Variable overhead (12,000*10) 120,000.00
Fixed overhead (12,000*45) 540,000.00
Total Cost 1,140,000.00
No. of Units 760,000.00
Cost per unit 1.50
(b) Calculation of the cost of purchasing the canisters
The company should go for manufacturing the canisters as the cost of manufacturing is $0.07 lower than cost of
purchase (cost of purchase is $1.57 whereas the cost to manufacture is $1.50).
Particulars Amount ($)
Cost of purchase $1
No. of units 760,000
Total purchase cost $760,000
Add: Unavoidable fixed costs (540,000-80,000-28,000) $432,000
Total costs $1,192,000
Cost per unit $1.57
(c) Analysis of special offer
The offer should be accepted as the offered price for special offer is $1.40 and cost per unit of manufacturing this
special offer is $0.79.
Particulars Reference calculation Amount ($)
Direct material (20,000*300,000/760,000) 7,895

Direct labour (20,000*180,000/760,000) 4,737
Variable overhead (20,000*120,000/760,000) 3,158
Total Cost 15,789
Units 20,000
Cost per unit 0.79
(d) The following are the other factors that the firm should consider before deciding whether to accept the order
or not:
a. To check the availability of raw material and other required materials for the production.
b. To check the availability of labour skilled, unskilled for production.
c. To access the profitability of the new offer, whether the new offer would be profitable for the company or
not.
d. To check impact on existing pricing as existing may demand reduction in price.
(e) Manufacturing of coffee cup or canisters
The company should go for manufacturing of canisters as the profit from manufacturing coffee cups is $60,000
whereas the profit from manufacturing canisters is $ 532,000. So, the company should manufacture canisters.
Profit from manufacturing coffee cups
Particulars Amount ($)
Direct material 0.60
Direct labour 0.20
Variable overhead 0.10
Fixed overhead 0.15
Cost per unit 1.05
Selling Price 1.20
Profit 0.15
No. of units 400,000
Total Profit 60,000