Ergo Products manufactures a variety of ergonomic household tools including a co
ID: 2484876 • Letter: E
Question
Ergo Products manufactures a variety of ergonomic household tools including a cordless drill. The cordless drill comes with a battery recharger. Currently, the company manufactures its own recharger for the drill with the following unit costs:
Direct materials
$ 3.00
Direct labor
$ 3.00
Variable overhead
$ 1.00
In addition, when 5,000 rechargers are produced each year, Ergo applies $2 of fixed overhead costs to each recharger. Another manufacturer has offered to supply Ergo with a recharger at a cost of $8 each. If Ergo accepts the offer, 80% of the fixed overhead allocated to the rechargers will be avoidable.
Required:
A.
List at least two qualitative factors that Ergo Products should consider in this make or buy decision.
B.
Should the company make or buy this product?
C.
If the company could generate another $2.50 of contribution margin from a new product that would use the equipment and personnel that are currently making the charger, would your decision change and explain your decision.
Direct materials
$ 3.00
Direct labor
$ 3.00
Variable overhead
$ 1.00
Explanation / Answer
ANSWER A :- The qualitative factors :-
1) does supplier have enough capacity to meet the demand?
2) will supplier keep up to the quality standards for the product?
ANSWER B:- ( in $)
ANSWER C:-
If the company could generate another $2.50 of contribution margin from a new product that would use the equipment and personnel that are currently making the charger. The decision will not change as the cost of buying will reduce furthur = ( 42000 - 2.50* 5000) =$ 29500
STATEMENT OF COMPARATIVE COST MAKE BUY Direct Materials 15000 Direct Labour 15000 Direct Variable Overheads 5000 Fixed Overhead 10000 2000 Cost of Purchase 40000 Total 45000 42000Related Questions
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