Management Accounting

In: Business and Management

Submitted By sdali1
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(9) In order to evaluate the proposal that BRRR Pty Ltd should outsource the production to Phew Ltd we need to consider which costs are avoidable and which are not. The avoidable costs are those costs that will not be incurred if the decision is made to buy the product rather than manufacture it. The unavoidable costs are those costs that will be incurred whether the product is manufactured or bought from an external firm.
Avoidable Costs: ustomer service cost per unit will be incurred since this is linked with the number of units sold regardless of whether they are purchased or manufactured. The total fixed cost associated with customer service will be incurred. The total fixed cost associated with 5 days of marketing will also be incurred regardless of the option chosen. The distribution cost will also be incurred because BRRR would need to distribute the units accordingly to its Sales Centre’s independent of whether it purchases or manufactures.

Marketing costs saved = 3000*5 = $15000
Production cost (maintenance excluded) = $200000
Total costs savings due to purchasing the product are $1051000
Additional costs of purchasing the product are 1370000-1051000 = $319000.
Profit before tax from manufacturing the product is $53000. Additional cost of purchasing the product is $319000.
Hence, 319000-53000 = $(266000)
Therefore the firm will incur a loss of $(266000) if it opts to purchase the product from Phew Ltd instead of manufacturing itself.
(11) Option A is manufacturing the product in house. Option B is purchasing the product from an external party.
At the point of indifference, BRRR is going to spend the same amount regardless of what options it chooses.
At the point of indifference:
Total Cost for Option A = Total Cost for Option B

Fixed cost of option A + Variable cost per unit of option A * factor X = Fixed cost of option B +…...

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