HJ Manufacturing Produces 10,000 Units of a Part That Is

question 16

Essay

H.J. Manufacturing produces 10,000 units of a part that is used in their assembly process. The production costs are as follows:

H.J. Manufacturing has the option of purchasing these units from an outside supplier at $10.75 per unit. If the part is outsourced, 40% of the fixed costs cannot be immediately converted to other uses.
a.Describe avoidable costs. What amount of the part's production costs is avoidable?
b.Should H.J. outsource the part? Why or why not?
c.What other items should H.J. consider before outsourcing any of the parts it currently manufactures?

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Definitions:

Markup Percentage

The amount by which the cost of a product is increased to arrive at the selling price, expressed as a percentage of the cost.

Fixed Costs

Expenses that do not change with the level of goods or services produced by the business over the short term.

Product Cost Concept

The accounting principle that determines the cost of a product by adding the costs of raw materials, labor, and overhead incurred in its production.

Rate of Return

The increase or decrease in the value of an investment during a certain timeframe, represented as a percentage of the original investment's cost.