Hagerstown Lab Supplies (HLS) is a distributor of equipment to factories that te
ID: 2483365 • Letter: H
Question
Hagerstown Lab Supplies (HLS) is a distributor of equipment to factories that test turbines and
other high-power machinery. HLS manufactures some of its equipment, including several
types of electrical load banks. The company currently manufactures 12,000 inductive load
banks per year, although production levels have varied between 10,000 and 15,000 over the
last five years. The company is considering purchasing the inductive load banks from an
outside supplier.
HLS’s current cost to produce one inductive load bank based on the current budgeted activity
of 12,000 units per year follows:
Direct Material $1,800
Direct Labor 760
Variable Overhead 790
Fixed Overhead 850
TOTAL $4,200
All variable per unit costs will remain at these levels for the output range of 10,000 to 15,000.
Fixed overhead in total will remain at current levels for the output range of 10,000 to 15,000.
An outside vendor has offered the following pricing per inductive load bank based on a fiveyear
contract for a minimum of 60,000 units in total:
Units 10,000 12,500 15,000
Price $3,525 $3,400 $3,300
Freight 200 175 150
TOTAL $3,725 $3,575 $3,450
Total fixed overhead costs would be reduced by 20% if HLS outsourced the inductive load
banks. HLS could generate $1,500,000 income if it were to divert the resources devoted to the
current inductive load banks production if the company decided to buy from the outside
vendor.
Prepare analyses including relevant per unit costs for each alternative (make or buy) for three
volumes of compressor housings:
a) 10,000
b) 12,500
c) 15,000
d) Should HLS outsource the inductive load banks? How does the minimum
quantity of 60,000 units over five years factor into your decision? What other
information would you like to have to make the best decision? Explain and elaborate.
Explanation / Answer
HLS CURRENT COST BASED ON 12000 UNITS: total cost unit cost direct material 21600000 1800 direct labor 9120000 760 variable overhead 9480000 790 fixed overhead 10200000 850 50400000 4200 variable cost of production = 3350 savings in fixed costs if outsourced = 20% of 10200000*0.2 = 2040000 income that can be earned by diverting the resources = 1500000 Price per unit offered by the outside contractor: for 10000 units - $3725 for 12500 units - $3575 for 15000 units - $3450 Differential cost analyses: for 10000 units: differential produce outsource costs variable costs: at $3350 per unit 33500000 at $3725 per unit 37250000 -3750000 savings in overhead costs 2040000 alternative income 1500000 Change in net income -210000 for 12500 units: differential produce outsource costs variable costs: at $3350 per unit 41875000 at $3575 per unit 44687500 -2812500 savings in overhead costs 2040000 alternative income 1500000 Change in net income 727500 for 15000 units: differential produce outsource costs variable costs: at $3350 per unit 50250000 at $3450 per unit 51750000 -1500000 savings in overhead costs 2040000 alternative income 1500000 Change in net income 2040000 Suggestion: It is advantageous to outsource only if the quantity is 12500 or 15000 units per year. The company may buy 12500 units per year to take advantage of the lower price and other benefits. If the demand is less that 12500 inventory levels would go up with associated costs. Purchase of 15000 units can be made if the demand warrants. The storage costs of invetory should be available to find its effect on the decision taken, as buying at 1ots of 12500 may result in increase in inventory levels at current rate of demand.
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