Atwater Corporation manufactures winter sports equipment. The company has decide
ID: 2477907 • Letter: A
Question
Atwater Corporation manufactures winter sports equipment. The company has decided to introduce a new line of snowmobiles, the XLR8, for next winter. These snowmobiles will be sold to retailers for $4,200 per vehicle. Because Atwater has some idle capacity, only $500,000 for additional fixed costs will be incurred annually. Atwater expects to manufacture and sell 10,000 XLR8 snowmobiles during the first year. Other estimated manufacturing costs per snowmobile are as follows:
Direct Materials $1,500
Direct Labor $1,750
Variable Overhead $250
The above costs include the costs of manufacturing the high performance engine for the XLR8.
Atwater is also considering buying these engines from Premier Motors for $600 per engine. If Atwater buys the engines from Premier, Atwater would reduce its direct labor cost by 10%, its direct materials cost by 25%, its variable overhead cost by 10%, and the $500,000 of fixed costs by 70%.
(A) Should Atwater make or buy the engines? Show calculations supporting your answer.
(B) What would be the maximum outside purchase price acceptable to Atwater for each engine assuming that 10,000 XLR8 snowmobiles are manufactured during the first year? Show calculations to support your answer.
(C) Revised estimates show a first year sales volume of 20,000 XLR8 snowmobiles. At this new volume, additional equipment, at an annual rental cost of $200,000 must be acquired to manufacture enough high performance engines. This additional equipment gives Atwater the capacity to produce up to 35,000 engines each year. [Note: This equipment is used exclusively to manufacture the engines and no other component of the snowmobile.] Atwater expects sales on the XLR8 to level off at 30,000 snowmobiles during the second year. Under the revised circumstances, should Atwater make or buy the engines? Show calculations supporting your answer.
(D) What qualitative factors (list at least three) should Atwater consider in deciding whether to make or buy the high performance engines?
Explanation / Answer
Ans:-
(a)
If company manufactures on own If buy engine from outside
Analysis:
If company manufactures on own If buy engine from outside
As per above analysis buying engine from Premier Motors for $600 per engine is acceptable.
(B)
The maximum price we could accept from outside is :
we can accept the price increse in from 600 to above only upto the profit we r getting extra because we are buying from the outside i.e (6,600,000 - 6,500,000) = 100,000 $ we are getting extra ,so,upto that we can bear the increase in price
maximum increse in price per unit is = 100,000/10,000units = 10 / unit
so,maximum price acceptable = 600+10 = $610
(C)
incremental analysis:
incremental cost =200,000
incremental sales in units =10,000 units 1st year,30,000 units in 2nd year
if we manufacture:-
increase in profir - increase in cost = (10000*700) - (200,000) = 6,800,000
2nd year =(20000*700) - (200,000) = 13,800,000
TOTAL = 20,600,000
if we buy outside:-
1 st year =(10000*675)+100,000(diff in profit) =6,850,000
2 nd year =(20000*675) =13,500,000
TOTAL = 20,350,000
now,own manufacturing is acceptable
(d)
1)buy engines from outside as it can reduce the workload by the company
2)external reputation is also imporant while making equipment
Particulars Amount ($) Particulars Amount ($) Sale Price (A) 4,200 Sale Price (A) 4,200 COST: Direct Material 1500 Direct Material 1125 Direct Labour 1750 Direct Labour 1575 V.O.H 250 V.O.H 225 engine cost 600 Total Varible Cost (B) 3500 Total Varible Cost(B) 3525 CONTRIBUTION P/U (A-B) 700 CONTRIBUTION P/U (A-B) 675 Fixed cost 500,000 Fixed cost 150,000Related Questions
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