CHAPTER 4 : Differential Cost Analysis (Relevant Costing) KAEB Make or Buy a part Toblerone

Corporation manufactures part X-24 for us in its production cycle. The cost per unit for 10,000
units of part X-24 are as follows: Direct Materials P 6.00 Materials handling costs (20%) 1.20
Direct Labor 20.00 Variable overhead 5.00 Fixed overhead 11.00 Total 43.20 Ferrero Company
has offered to sell Toblerone Corporation 10,000 units of part X-24 for P40 per unit. If
Toblerone accepts Ferrero’s offer, P4 of the fixed overhead per unit could be eliminated. The
materials handling costs pertain to the cost of receiving and inspecting incoming materials and
other components which are not included in the overhead. If the part is outsourced from an
outside supplier, one-half on the released facilities could be used to produce a new product,
Citrus, which is expected to generate a contribution margin of P90,000 per year. Additionally, a
savings of P15,000 is expected if the parts are purchased outside. The other half of the released
facilities could be rented out for P60,000 per annum. The outside supplier requires that an
equipment be leased to meet the order of the company. The equipment rental cost of P80,000
shall be charged to the Company. Required: 1. What alternative is better, make or buy the part
and by how much is the advantage? 2. The sunk cost (or irrelevant cost) in the decision of
making or buying part. Accept or reject a special sales order The manufacturing capacity of
NorthWind Corporation’s facilities is 50,000 units of product a year. A summary of operating
results for the year end December 31, 2016 is as follows: Total Per Unit Sales (38,000 units) P
3,800,000 P 100 Less: Variable costs and expenses 2,090,000 55 Contribution Margin 1,710,000
P 45 Less: Fixed costs and expenses 900,000 Operating income P 810,000 A distributor company
has offered to buy 12,000 units at P90 per unit during 2017. Assume that all of the
corporation’s costs would be at the same levels and rates in 2017 as to 2016. Required: Should
NorthWind Corporation accept or reject the special sales order? (Consider the following cases
independently.) 1. The corporation has no alternative use of the idle capacity. 2. The
corporation can rent out the idle capacity for P200,000. 3. The corporation can use the idle
capacity to produce a new product that could contribute a P600,000 contribution margin