Spork Products Inc. manufactures and distributes barbecue grills. The company no

Question

Spork Products Inc. manufactures and distributes barbecue grills. The company normally sells 1,000 of these grills each month for a price of $140 each. The material cost for a grill is $44 and the direct labor is $22. The variable overhead cost is $13 per grill, and the fixed overhead cost is $30,000 per month. A contract manufacturer has approached the company and offered to supply the grills ready to sell for $85 each. The company management believes that if it accepts this offer, Spork Products will be able to lease unused factory space for $10,000 per month.

Perform a make-versus-buy analysis.

Explanation / Answer

The solution for the above problem is as follows :

Profit if the company manufacures and sells out 1000 units

= sales - contribution - fixed cost

= (1000*140) - ( 1000* (44+22+13) ) - 30,000

= $140,000 - $79,000 - 30000

= $ 31,000

If the company accepts grills which are ready to sell from contract supplier , then company need not incur fixed overhead costs and it has the benefit of leasing the unused factory space for $ 10,000 per month

Therefore profit in this case will be as follows

= 1000*(140-85) + $ 10,000

= 55,000 + 10,000

= $ 65,000

Since profit is more when the company buys the product from the contract manufacturer , so the best option for the Spork products will be to BUY from the contract manufacturer and then sell .

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