Should Playdough Manufacture or Purchase Canisters?

Playdough Company is considering whether to accept an offer to purchase canisters from another company or manufacture them themselves. The analysis shows that if they avoid fixed costs, their per unit cost would be $1.36, which is lower than the offered price of $1.40. However, the company should also consider other factors such as quality, profit earned compared to other products, and total cost optimization before making a decision.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Student’s Name
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1MANAGEMENT ACCOUNTING
The Playdough company currently produces 760,000 playdough canisters per year at its local
plant as it sells the product in canisters. The details of the costs in producing the canisters
are:
Direct materials $ 300,000
Direct labour 12000 hrs at $15 per hr 180,000
Variable overhead $10 per direct labour hr 120,000
Fixed overhead $45 per direct labour hr 540,000
Total cost $ 1,140,000
The Playdough company has received an offer from the Cannister company to supply the
cannisters at $1 per canister. The only fixed overhead that would be avoided would be
$80,000 of supervisors salaries and $28,000 machinery depreciation. The remaining fixed
overhead would continue to be incurred.
The Playdough company currently sell their canisters for $2.20 per canister.
Question Number A:
Calculate the cost per unit of producing the canisters under the traditional approach.
Particulars Figures
Total production (Per Year) Units 760000
Direct materials $ 3,00,000.00
Direct labour 12000 hrs at $15 per hr $
1,80,000.00
Variable overhead $10 per direct labour hr $
1,20,000.00
Fixed overhead $45 per direct labour hr $
5,40,000.00
Total Cost $
11,40,000.00
Per Unit cost under traditional approach $ 1.50
Calculation of cost per unit of producing (Traditional approach) = (Total cost/ Number of
units produced)
Per unit cost= (Total production in units = 7, 60,000/ Total Cost = $11, 40,000) = $1.50

2MANAGEMENT ACCOUNTING
Question Number B:
Should the company purchase the canisters or continue manufacturing them? Show
workings
Particulars Figures
Total production (Per Year) Units 760000
Direct materials $ 3,00,000.00
Direct labour 12000 hrs at $15 per hr $ 1,80,000.00
Variable overhead $10 per direct labour hr $ 1,20,000.00
Fixed overhead (540000-80000-28000) $ 4,32,000.00
Total Cost $ 10,32,000.00
Per Unit cost after avoiding (Supervisor's salary and Depreciation) $ 1.36
Offered Price of the Canister's company $ 1.00
Here, in the above table we can see that Company Playdough is able to manufacture
the Canister $1.36 per unit whereas another company is offering the same product in lesser
price $ 1 per unit. So if playdough will go for the manufacturing decision, they have to bear $
0.36 more cost for each unit. On the other hand, if they are going with the purchase decision
then only $ 1 per unit required to bear. Also company earned per unit profit will be more. As
company Playdough has plan to sell each product @ $ 2.20, so total profit per unit will be
$1.20 (If they are going with purchase decision) else profit per unit will be $0.84
respectively.
Company playdough will decided to go for the purchase option which is more profitable.

3MANAGEMENT ACCOUNTING
Question Number C:
The company has decided to continue manufacturing the canisters and has a special
order for the canisters from an outside client who has offered $1.40 per canister for
20,000 canisters. As the firm has capacity purely on financial grounds should the firm
accept the offer?
Rather than purchase if company Playdough has decided to manufacture the product
by their own by avoiding fixed cost (supervisor’s salary + Depreciation).
Particulars Figures
Total production (Per Year) Units 760000
Direct materials $ 3,00,000.00
Direct labour 12000 hrs at $15 per hr $ 1,80,000.00
Variable overhead $10 per direct labour hr $ 1,20,000.00
Fixed overhead (540000-80000-28000) $ 4,32,000.00
Total Cost $ 10,32,000.00
Per Unit cost after avoiding Fixed cost (Supervisor's salary and
Depreciation)
$ 1.36
If company will go with the traditional costing approach by avoiding fixed cost like
Supervisor’s salary and depreciation will determined the per unit cost = $1.36. Whereas on
the other hand, per unit price offered by another company is $1.40. So if company playdough
is making decision on their profitability ground then they will go with the offer for 20000
canisters. They will receive $0.04 profits from each unit. Total profit will be $800
respectively.

4MANAGEMENT ACCOUNTING
Question Number D:
What other factors should the firm consider before deciding whether to accept the
order in part (c)?
In the above scenario company Playdough is also required to follow some other
criteria which can be monetary or non monetary (Drury 2013). before accepting the offer are
quality of the product, amount of profit earned by the company compare to other
manufacturing products and also optimization of total cost while producing goods. If the
company is able to optimize the cost of production, so manufacturing goods will be more
profitable for them.

5MANAGEMENT ACCOUNTING
Question Number E:
The Playdough Company has been approached to manufacture special coffee cups. This
would have the following costs per unit:
Direct material $ 0.60
Direct labour $ 0.20
Variable overhead $ 0.10
Fixed overhead $ 0.15
The coffee cups would then be sold for $1.20 per coffee cup. It could manufacture and
sell 400,000 of these coffee cups. Should the Playdough Company purchase the canisters
from the Canister Company and start manufacturing coffee cups or continue
manufacturing canisters? Show workings.
Particulars Figures
Total coffee cups produced (Units) 4,00,000
Direct material $
0.60
$ 2,40,000.00
Direct labour $
0.20
$ 80,000.00
Variable overhead $
0.10
$ 40,000.00
Fixed overhead $
0.15
$ 60,000.00
Per unit Sold $
1.20
Total Cost $ 4,20,000.00
Total Revenue $ 4,80,000.00
Profit $ 60,000.00
Per unit cost $ 1.05

6MANAGEMENT ACCOUNTING
Per unit profit $ 0.15
As per the overall calculation it is shown that, if company will go for the
manufacturing of coffee cups, so they will generate profit of $0.15 for each unit of coffee
cups. On the other hand, if company go for purchasing the canister from another company so
their selling price will be $1.40 whereas they have to bear only $1.36 for each unit of
canister; profit will be 0.04 from each. Last but not the least, if company will go
manufacturing the canister through their traditional approach then their manufacturing cost
will be $1.50 per unit and selling price will be $2.20, profit from each unit will be $0.70. If
Playdough Company is totally based on their financial grounds, so they will go for the
manufacturing canister by following traditional approach of costing.

7MANAGEMENT ACCOUNTING
Question Number F:
Are there any other factors which should be considered in deciding whether to
manufacture the canisters or purchase them from the outside supplier?
There are several other factors which are influences the company’s buying and
manufacturing decision rather than profit. Those factors are like skilled labour, less
requirement of products (Needles, Powers and Crosson 2013). Nowadays companies are
following the outsourcing techniques, which are better for them to avoid criticality of making
business strategies. Outsourcing techniques can easily support for the business activities to
move forward and sustain their business bounding with other companies for longer period of
time. Here for company Playdough, we can suggest that company is performing well in the
marketing and also they have all the services available to process their manufacturing
concern effectively and produce low cost products with quality. Manufacturing canister is the
best for the Playdough as they have skilled labour and also maintenance cost of the company
is less. If a company is able to manage their overhead cost during manufacturing process then
they should go for the manufacturing option rather than purchasing option.

8MANAGEMENT ACCOUNTING
Reference
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