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UNIVERSITY OF TECHNOLOGY
SCHOOL OF BUSINESS ADMINISTRATION
MAKE OR BUY/SPECIAL ORDER TUTORIAL SHEET
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
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1. White Motor Company manufactures 7,500 units of a particular part.

manufacture this part is as follows:

Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total

The unit cost to

$ 3
4
2
8
$17

Diya Company offered to sell 7,500 units of the part to the White Motor Company for
$14 per unit. White has determined that 75 percent of the fixed manufacturing
overhead will continue even if the part is purchased from Diya and now must decide
whether to accept Diya's offer. White has calculated the relevant costs of
manufacturing the part internally to be
a. $127,500
b. $112,500
c. $82,500
d. $67,500
Figure 17-1
Galaxy Industries manufactures 15,000 components per year.
of the components was determined to be as follows:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total

____

2. Refer to Figure 17-1.

____

3. Refer to Figure 17-1.

The manufacturing cost

$150,000
240,000
90,000
120,000
$600,000

Assume that the fixed manufacturing overhead reflects the

cost of Galaxy's manufacturing facility. This facility cannot be used for any other
purpose. An outside supplier has offered to sell the component to Galaxy for $34.
If Galaxy Industries purchases the component from the outside supplier, the effect
on income would be a
a. $30,000 decrease
b. $30,000 increase
c. $90,000 decrease
d. $90,000 increase
Assume Galaxy Industries could avoid $40,000 of fixed
manufacturing overhead if it purchases the component from an outside supplier. An
outside supplier has offered to sell the component for $34. If Galaxy purchases the
component from the supplier instead of manufacturing it, the effect on income would
be a
a. $60,000 increase
b. $10,000 increase
c. $100,000 decrease
d. $140,000 increase
Figure 17-2
BG Industries manufactures 40,000 components per year.
the components was determined to be as follows:

Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total

The manufacturing cost of

$ 50,000
80,000
30,000
40,000
$200,000

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4. Refer to Figure 17-2.

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5. Refer to Figure 17-2.

If BG Industries purchases the component from an outside

supplier for $4.25 per unit, the effect on income would be a
a. $30,000 decrease
b. $30,000 increase
c. $10,000 decrease
d. $10,000 increase
Assume BG Industries could avoid $15,000 of fixed
manufacturing overhead if it purchases the component from an outside supplier.
BG purchases the component from a supplier for $4.25 per unit instead of
manufacturing it, the effect on income would be a
a. $5,000 increase
b. $15,000 increase
c. $25,000 decrease
d. $35,000 increase

If

Figure 17-3
JED Industries manufactures 10,000 components per year.
component was determined to be as follows:

The manufacturing cost per

Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total

$240,000
360,000
80,000
280,000
$960,000

An outside supplier has offered to sell the component for $84.

____

6. Refer to Figure 17-3.

Assume JED Industries could avoid $40,000 of fixed

manufacturing overhead if it purchases the component from the outside supplier.
JED purchases the component from the supplier instead of manufacturing it, the
effect on income would be a
a. $320,000 increase
b. $160,000 increase
c. $120,000 decrease
d. $80,000 decrease

If

Figure 17-4
RED Industries manufactures 20,000 components per year.
component was determined to be as follows:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total

The manufacturing cost per

$ 30,000
45,000
10,000
35,000
$120,000

An outside supplier has offered to sell the component for $5.25.

____

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7. Refer to Figure 17-4.

Assume RED Industries could avoid $5,000 of fixed

manufacturing overhead if it purchases the component from the outside supplier.
RED purchases the component from the supplier instead of manufacturing it, the
effect on income would be a
a. $40,000 increase
b. $10,000 decrease
c. $20,000 increase
d. $15,000 decrease

If

8. Jigger Corporation has 3,000 out-of-style winter hats that cost the company $6,000
to manufacture. If the hats are restyled for $2,500, they can be sold for $5,000.
The other alternative is to sell them for scrap for $1,000. Which alternative is
more desirable?
a. restyle
b. sell for scrap
c. do nothing
d. none of the above

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Figure 17-6
Missoula Industries manufactures a product with the following costs per unit at the
expected production of 30,000 units:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead

$ 5
15
8
6

The company has the capacity to produce 60,000 units. The product regularly sells
for $45. A wholesaler has offered to pay $40 each for 2,000 units.

____

9. Refer to Figure 17-6.

If the special order is accepted, the effect on Missoula's

operating income would be a
a. $24,000 increase
b. $34,000 increase
c. $10,000 decrease
d. $12,000 decrease

____ 10. Salish Industries manufactures a product with the following costs per unit at the
expected production of 60,000 units:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead

$ 8
15
10
12

The company has the capacity to produce 70,000 units. The product regularly sells
for $60. A wholesaler has offered to pay $55 each for 5,000 units.
If the special order is accepted, the effect on operating income would be a
$42,000 decrease
$67,000 increase
$110,000 increase
$182,000 decrease

a.
b.
c.
d.

____ 11. Bridge Industries manufactures a product with the following costs per unit at the
expected production of 78,000 units:

Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead

$15
22
12
19

The company has the capacity to produce 80,000 units. The product regularly sells
for $90. A wholesaler has offered to pay $75 each for 2,000 units.
If Bridge's special order is accepted, the effect on operating income would be a
$20,000 decrease
$52,000 increase
$14,000 increase
none of the above

a.
b.
c.
d.
Problem

12. Vance Company manufactures a product that has the following unit costs: direct
materials, $15; direct labor, $12; variable overhead, $8; and fixed overhead, $12.
Fixed selling costs are $1,500,000 per year. Variable selling costs of $4 per unit
cover the transportation cost. Although production capacity is 800,000 units per
year, the company expects to produce only 650,000 units next year. The product
normally sells for $70 each. A customer has offered to buy 50,000 units for $45
each. The customer will pay the transportation charge on the units purchased.
Required:
a. What is the incremental cost to Vance Company for the special order?
b. What is the effect on Vance's income if the special order is accepted?

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13. Majestic Company manufactures a product that has the following unit costs: direct
materials, $5; direct labor, $7; variable overhead, $3; and fixed overhead, $5.
Fixed selling costs are $200,000 per year. Variable selling costs of $1 per unit
cover the transportation cost. Although production capacity is 80,000 units per
year, the company expects to produce only 65,000 units next year. The product
normally sells for $30 each. A customer has offered to buy 10,000 units for $18
each. The customer will pay the transportation charge on the units purchased.
Required:
a. What is the incremental cost per unit to Majestic Company for the special
order?
b. What is the effect on Majestic's income if the special order is accepted?

14. Solomon Company manufactures 20,000 components per year.

unit of the components is as follows:

Direct materials
Direct labor
Variable overhead
Fixed overhead
Total unit cost

The manufacturing cost per

$10
14
6
8
$38

Assume that the fixed overhead reflects the cost of Solomon's manufacturing
facility. This facility cannot be used for any other purpose. An outside supplier
has offered to sell the component to Solomon for $32.
Required:
a. What is the effect on income if Solomon purchases the component from the
outside supplier?
b. Assume that Solomon can avoid $50,000 of the total fixed overhead costs if
it purchases the components. Now what is the effect on income if Solomon
purchases the component from the outside supplier?

15. Mills Inc. manufactures 50,000 components per year.

The manufacturing cost per unit

of the components is as follows:

Direct materials
Direct labor
Variable overhead
Fixed overhead
Total unit cost

$12
13
5
10
$40

An outside supplier has offered to sell the component to Mills Inc. for $35.
Required:
a. What is the effect on income if Mills Inc. purchases the component from
the outside supplier?
b. Assume that Mills Inc. can avoid $700,000 of the total fixed overhead
costs if it purchases the components. Now what is the effect on income if
Mills Inc. purchases the component from the outside supplier?