Waterways has discovered that a small fitting it now manufactures at a cost of $
ID: 2489061 • Letter: W
Question
Waterways has discovered that a small fitting it now manufactures at a cost of $1.00 per unit could be bought elsewhere for $0.82 per unit. Waterways has fixed costs of $0.20 per unit that cannot be eliminated by buying this unit. Waterways needs 460,000 of these units each year. If Waterways decides to buy rather than produce the small fitting, it can devote the machinery and labor to making a timing unit it now buys from another company. Waterways uses approximately 500 of these units each year. The cost of the unit is $12.66. To aid in the production of this unit, Waterways would need to purchase a new machine at a cost of $2,345, and the cost of producing the units would be $9.90 a unit.
(b1) What is HARTSELL MANUFACTURING’ opportunity cost if it chooses to buy the small fitting and start manufacturing the timing unit?
(b2) Would it be wise for HARTSELL MANUFACTURING to buy the fitting and manufacture the timing unit? Explain.
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Explanation / Answer
Particulars Amount (in $) Make Buy Difference Total Variable Cost Small Fitting 460000.00 377200.00 82800.00 Total Fixed Cost Small Fitting 92000.00 92000.00 0.00 Total Annual Cost Small Fitting 552000.00 469200.00 82800.00 Opportunity Cost 500*$12.66 6330.00 $2,345 + (500*$9.90) 7295.00 Answer.b1 Total Opportunity Cost 6330.00 7295.00 -965.00 Answer.b2 No, it would not be wise for Hartsell Manufacturing to buy the fitting and manufacture the timing unit since costs are higher thus the company would make more profit if it made the fitting and made the timing unit. Answer. Problem 18 Cost Pool Cost Driver Assembling Product Assembled Billing Number of Billings Sent Digging Trenches Number of Trenches Dug Janitorial Janitor Hours Machine Maintenance Machine Hours Machine Setups Number of Setups Needed Molding Number of Items Molded Packaging Cost per Package or Number of Labour Hours Payroll Number of Employees Plant Supervision Supervisor Hours Product Design Cost per Design or Development Costs or Number of Designs Purchasing Materials Number of Purchase Orders Selling Number of Sales Calls or Number of Items Sold Testing Number of Tests Welding Labour Cost or Labour Hours
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