Question

Jordan Electronics currently produces the shipping containers it uses to deliver the electronics products it sells. The monthly cost of producing 9,200 containers follows: Unit-level materials Unit-level labor Unit-level overhead Product-level costs* Allocated facility-level costs $ 6,500 6,900 3,800 10,800 26,600 "One-third of these costs can be avoided by purchasing the containers. Russo Container Company has offered to sell comparable containers to Jordan for $2.70 each Required a. Calculate the total relevant cost. Should Jordan continue to make the containers? b. Jordan could lease the space it currently uses in the manufacturing process. If leasing would produce $11,700 per month, calculate the total avoidable costs. Should Jordan continue to make the containers? (Prey 6 of 7 Next > "One-third of these costs can be avoided by purchasing the containers. Russo Container Company has offered to sell comparable containers to Jordan for $2.70 each. Required a. Calculate the total relevant cost. Should Jordan continue to make the containers? b. Jordan could lease the space it currently uses in the manufacturing process. If leasing would produce $11,700 per month, calculate the total avoidable costs. Should Jordan continue to make the containers? a. Total relevant cost Should Jordan continue to make the containers? Total avoidable cost Should Jordan continue to make the containers?

Answer 1

Jordan Electronics should consider purchasing containers from Russo Container Company instead of producing them, as the total relevant cost of purchasing is less than the production cost. Additionally, if Jordan can lease out the production space, the financial benefits increase even further, reinforcing the decision to buy rather than produce the containers.

Step-by-step explanation:

Total Relevant Cost Calculation

To calculate the total relevant cost for Jordan Electronics in order to determine whether to continue making containers or to purchase them, we need to first understand which costs are avoidable should they decide to purchase instead of producing the containers.

The costs provided are:

Unit-level materials: $6,500

Unit-level labor: $6,900

Unit-level overhead: $3,800

Product-level costs*: $10,800

Allocated facility-level costs: $26,600

Since one-third of these costs can be avoided by purchasing the containers:

Avoidable costs = (1/3) × ($6,500 + $6,900 + $3,800 + $10,800 + $26,600)

Avoidable costs = (1/3) × $54,600 = $18,200

If Jordan purchases the containers, the cost would be $2.70 each for 9,200 containers:

Purchase costs = 9,200 × $2.70

Purchase costs = $24,840

Total relevant cost = Avoidable cost + Purchase costs

Total relevant cost = $18,200 + $24,840 = $43,040

The current cost of production is $54,600. Since the total relevant cost of purchasing the containers ($43,040) is less than the cost of producing them, Jordan Electronics should consider purchasing the containers from Russo Container Company.

Total Avoidable Cost with Leasing

If Jordan can lease the space used for the manufacturing process for $11,700 per month, this would add to the avoidable costs. The new avoidable costs would be:

New avoidable costs = Previous avoidable costs + Monthly lease income

New avoidable costs = $18,200 + $11,700 = $29,900

If we subtract these new avoidable costs from the total relevant cost to purchase the containers:

Total relevant cost with lease = Purchase costs - New avoidable costs

Total relevant cost with lease = $24,840 - $29,900 = -$5,060

The negative amount indicates a surplus, suggesting that not only would it be more cost-effective for Jordan to purchase the containers, but also leasing the space would yield additional financial benefit. Consequently, Jordan should definitely not continue making the containers if they can lease the space.