1MANAGEMENT ACCOUNTINGThe Playdough company currently produces 760,000 playdough canisters per year at its localplant as it sells the product in canisters. The details of the costs in producing the canistersare: 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 $ 1,140,000The Playdough company has received an offer from the Cannister company to supply thecannisters 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 fixedoverhead 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.ParticularsFiguresTotal production (Per Year) Units760000Direct materials $ 3,00,000.00Direct 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 ofunits produced)Per unit cost= (Total production in units = 7, 60,000/ Total Cost = $11, 40,000) = $1.50
2MANAGEMENT ACCOUNTINGQuestion Number B:Should the company purchase the canisters or continue manufacturing them? ShowworkingsParticularsFiguresTotal production (Per Year) Units760000Direct 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) $ 1.36Offered Price of the Canister's company $ 1.00Here, in the above table we can see that Company Playdough is able to manufacturethe Canister $1.36 per unit whereas another company is offering the same product in lesserprice $ 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 decisionthen only $ 1 per unit required to bear. Also company earned per unit profit will be more. Ascompany 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 $0.84respectively.Company playdough will decided to go for the purchase option which is more profitable.
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