The Playdough company currently produces 760,000 playdough canisters per year at its local plant as it sells the product in canisters.The details of the costs in producing the canisters are :
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 $ 1,140,000
The Playdough company has received an offer from the Cannister company to supply the cannisters 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 fixed overhead would continue to be incurred.
The Playdough company currently sell their canisters for $2.20 per canister .
(a) Calculate the cost per unit of producing the canisters under the traditional approach
(b) Should the company purchase the canisters or continue manufacturing them ?Show workings
(c) The company has decided to continue manufacturing the canisters and has a special order for
the canisters from an outside client who has offered $1.40 per canister for 20,000 canisters . As
the firm has capacity purely on financial grounds should the firm accept the offer?
(d) What other factors should the firm consider before deciding whether to accept the order in
(e) The Playdough company has been approached to manufacture special coffee cups .This would
have the following costs per unit :
Direct material $ 0.60
Direct labour 0.20
Variable overhead 0.10
Fixed overhead 0.15
The coffee cups would then be sold for $1.20 per coffee cup .It could manufacture and sell
400,000 of these coffee cups . Should.the Playdough company purchase the canisters from
the Canister company and start manufacturing coffee cups or continue manufacturing
canisters? Show workings .
(f) Are there any other factors which should be considered in deciding whether to manufacture
the canisters or purchase them from the outside supplier?