Janeiro Skate, Inc. currently manufactures the wheels that it uses for its in-li
ID: 2435373 • Letter: J
Question
Janeiro Skate, Inc. currently manufactures the wheels that it uses for its in-line skates. The annual costs to manufacture the 143,000 wheels needed each year are as follows:Total Cost
Direct material $ 175,000
Direct labor 52,000
Variable overhead 66,000
Fixed overhead 309,000
Total $ 602,000
Kasba Rubber Company has offered to provide Janeiro with all of its annual wheel needs for $2.80 per wheel. If Janeiro accepts this offer, 60% of the fixed overhead above could be totally eliminated. Also, Janeiro would be able to rent out the freed up space and could generate $80,000 of income annually.
Required:
a. Calculate the total savings if the wheels are bought. (Omit the "$" sign in your response.)
Total savings $
b. Calculate the purchase cost. (Omit the "$" sign in your response.)
Purchase cost $
c.
Calculate the net savings. (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)
Net savings $
d. Should Kasba Rubber Company make or buy?
Explanation / Answer
Required: a. Calculate the total savings if the wheels are bought. (Omit the "$" sign in your response.) Direct material $ 175,000 Direct labor 52,000 Variable overhead 66,000 Variable cost 293,000 Fixed overhead (60%) 185,400 Total Variable cost $478,400 Per unit variable cost $3.35 Per unit purchase price $2.80 Saving per unit $0.55 Saving in production = $78,650 Rent revenue $80,000 Total savings $158,650 b. Calculate the purchase cost. (Omit the "$" sign in your response.) Purchase cost $ 400,400 (143,000 x 2.80) c. Calculate the net savings. (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.) Per unit variable cost $3.35 Per unit purchase price $2.80 Saving per unit $0.55 Saving in production = $78,650 Net savings $ 78,650 d. Should Kasba Rubber Company make or buy? Since there is a total saving of $158,650, the company is advised to purchase from outside instead of making it.
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