Red Flag, Inc. currently produces Kids Scooters for sales under its own logo. Th

Question

Red Flag, Inc. currently produces Kids Scooters for sales under its own logo. They are also making the wheels that are the part of the final product. The costs of producing 5,000 wheels are listed below. Unit-level materials $30,000 Unit-level labor 22,000 Unit-level overhead 4,000 Product-level costs 8,900 Facility-level costs 18,000 The company has recently received an offer from an outside supplier to sell the wheels for $12 per unit. The company is considering whether they should make or buy the wheels. The accounting department has determined that they can avoid 20% of the product-level costs if they buy, but none of the facility-level costs can be avoided. In addition, they can rent their manufacturing space to another company for $5,000 if they decide to buy from the outside supplier. What is the difference in cost between making and buying and what should the company do?

Explanation / Answer

COST PER UNIT IN MAKING OPTION

COST PER UNIT IN BUYING OPTION

DIFFRENCE IN COST

= $16.58 - $16.024

= $0.556

THE COMPANY SHOULD GO WITH BUYING OPTION, AS IT IS CHEAPER THAN MAKING OPTION.

DESCRIPTION AMOUNT MATERIAL COST $30000 LABOUR COST $22000 OVERHEAD $4000 PRODUCT LEVEL COST $8900 FACILITY LEVEL COST $18000 TOTAL COST $82900 NUMBER OF UNITS $82900 COST PER UNIT $16.58

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