Make-Versus-Buy Decision Sports Equipment Unlimited makes and sells soccer goals

Question

Make-Versus-Buy Decision Sports Equipment Unlimited makes and sells soccer goals and has sales of 20,000 units per year. The plant is operating at full capacity. A potential supplier has approached Sports Equipment Unlimited and offered to supply the soccer goals at a finished cost of $31.50 per goal. If the company buys rather than manufactures, they will be able to eliminate 60% of fixed manufacturing costs by leasing unused space. The current costs are as follows: Per Unit Direct labor                    200,000                   10.00 Direct materials                    247,000                   12.35 Variable manufacturing overhead                       60,000                     3.00 Fixed manufacturing overhead                    170,000                     8.50 Total manufacturing cost                    677,000                   33.85 INSTRUCTIONS: Prepare an incremental analysis for the decision to make or buy the soccer goals. Show the cost of continuing to make and to buy the goals. Show the effect on net income if they buy. Should Sports Equipment Unlimited buy the goals? Change in Make Buy Net Income Direct labor                              -   #VALUE! Direct materials                              -   #VALUE! Variable manufacturing overhead                              -   #VALUE! Fixed manufacturing overhead     #VALUE! #VALUE! Purchase cost                  630,000 #VALUE! Total manufacturing cost                                -   #VALUE! #VALUE! Sports Unlimited should continue to manufacture the goals, even though the unit cost is higher than the purchase price. This is true because there will be some remaining fixed costs even if they buy. As we see, the net income will fall by $21,000 if Lancaster buys the goals. Make-Versus-Buy Decision Sports Equipment Unlimited makes and sells soccer goals and has sales of 20,000 units per year. The plant is operating at full capacity. A potential supplier has approached Sports Equipment Unlimited and offered to supply the soccer goals at a finished cost of $31.50 per goal. If the company buys rather than manufactures, they will be able to eliminate 60% of fixed manufacturing costs by leasing unused space. The current costs are as follows: Per Unit Direct labor                    200,000                   10.00 Direct materials                    247,000                   12.35 Variable manufacturing overhead                       60,000                     3.00 Fixed manufacturing overhead                    170,000                     8.50 Total manufacturing cost                    677,000                   33.85 INSTRUCTIONS: Prepare an incremental analysis for the decision to make or buy the soccer goals. Show the cost of continuing to make and to buy the goals. Show the effect on net income if they buy. Should Sports Equipment Unlimited buy the goals? Change in Make Buy Net Income Direct labor                              -   #VALUE! Direct materials                              -   #VALUE! Variable manufacturing overhead                              -   #VALUE! Fixed manufacturing overhead     #VALUE! #VALUE! Purchase cost                  630,000 #VALUE! Total manufacturing cost                                -   #VALUE! #VALUE! Sports Unlimited should continue to manufacture the goals, even though the unit cost is higher than the purchase price. This is true because there will be some remaining fixed costs even if they buy. As we see, the net income will fall by $21,000 if Lancaster buys the goals.

Explanation / Answer

ANS;

Incremental analysis for decision making Total cost Total cost Incremental of making of buying cost Cost of Soccer goals 630000 630000 Direct Labour 200000 0 -200000 Director Materials 247000 0 -247000 Variable mfg OH 60000 0 -60000 Fixed Mfg OH 170000 68000 -102000             Total Cost     677000 698000 21000 Cod per unit $ 33.85 34.9 If they buy, the net income would decrease by $21,000 Sports Equipment Unlimited should make the goals as the cost making is lower than buying

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