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Part IV
Seymour Chemical Company makes a variety of cosmetic products, one of which is a skin cream designed to reduce the signs of aging. Seymour produces a relatively small amount (14,000 units) of the cream and is considering the purchase of the product from an outside supplier for $5.70 each. If Seymour purchases from the outside supplier, it would continue to sell and distribute the cream under its own brand name. Seymour’s accountant constructed the following profitability analysis.

 

 

 

  Revenue (14,000 units × $14.0)

$

196,000

 

     Unit-level materials costs (14,000 units × $1.70)

 

(23,800

)

     Unit-level labor costs (14,000 units × $.60)

 

(8,400

)

     Unit-level overhead costs (14,000 × $.40)

 

(5,600

)

     Unit-level selling expenses (14,000 × $.20)

 

(2,800

)

 




  Contribution margin

 

155,400

 

     Skin cream production supervisor’s salary

 

(57,000

)

     Allocated portion of facility-level costs

 

(13,900

)

     Product-level advertising cost

 

(46,000

)

 




  Contribution to companywide income

$

38,500

 

 








 

Required:

 

a.

Calculate the total avoidable costs. 

 

b-1.

Calculate the total avoidable cost per unit. 

 

b-2.

Should Seymour continue to make the product or buy it from the supplier?

   
   

 

 

c-1.

Suppose that Seymour is able to increase sales by 10,000 units (sales will increase to 24,000 units). Calculate the total avoidable costs. 

c-2.

At this level of production, should Seymour make or buy the cream?

 

 

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