Golfers, Inc. (GI) manufactures golf related equipment including golf balls. Thi

Question

Golfers, Inc. (GI) manufactures golf related equipment including golf balls. This year's expected production of golf balls is 80,000 packs (each consisting of four golf balls). Cost data are as follows: Per Pack 80,000 Packs Product costs directly traceable to balls: Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead $2.60 $208,000 112,000 12,000 67,200 39,200 1.40 0.15 General allocated overhead 438,400 The full cost of one pack of golf balls is $5.48. Gl has received an offer from an outside supplier to supply any desired quantity of balls at a price of $5.35 per pack of four golf balls. The cost accounting department has provided the following information: a. The direct fixed manufacturing overhead is the cost of leasing the machine that stamps out the balls The machine can produce a maximum of 500,000 balls per year. If the balls are bought, the machine will no longer be needed b. No other costs will be affected Required 1. Prepare an analysis showing whether Gl would be better off making or buying the balls at a projected volume of 80,000 packs (320,000 golf balls). (Round "Per Unit" answers to 2 decimal places.) 80,000 packs Per Unit Make Buy Difference Purchase Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead General allocated overhead Total costs

Explanation / Answer

1) Analysis showing make or buy decision (80,000 packs) (Amount in $)

GI would be better off making the balls as there is loss of $28,800 on buying the balls from supplier.

2-a) Indifference point is a point at which total costs of both alternatives are equal. We can calculate indifference point by assuming Indifferent point equal to X and formulating an equation which is shown as follows:-

Total costs of Make = Total costs of buy

$(2.60+1.40+0.15)*X + $67,200 + $39,200 = $5.35X + 39,200

$67,200+$39,200-$39,200 = $5.35X - $4.15X

$67,200 = $1.20X, X = $67,200/$1.20 = 56,000 packs

Thus at the 56,000 packs the company would be indifference between making and buying

2-b) In case quantity exceeds the indifference point, the alternative with higher fixed cost and lower variable cost per unit wil be beneficial and other alternative having lower fixed cost and higher variable cost per unit will cost more to company.

Thus in this case, It will cost more to buying if the quantity exceeds 56,000 packs.

It will cost more to making if the quantity below 56,000 packs

3) The quantitative and qualitative factors that GI should consider before making final decision

Particulars Per unit Make Buy Difference Purchase 5.35 - 428,000 (428,000) Direct materials 2.60 208,000 - 208,000 Direct Labour 1.40 112,000 - 112,000 Variable manufacturing overhead 0.15 12,000 - 12,000 Fixed manufacturing overhead 67,200 - 67,200 General allocated Overhead 39,200 39,200 0 Total Costs 438,400 467,200 (28,800)

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