Make-Versus-Buy Decision Sports Equipment Unlimited makes and sells soccer goals

Question

Make-Versus-Buy Decision Sports Equipment Unlimited makes and sells soccer goals and has sales of 20,000 units per year. The plant is operating at full capacity. A potential supplier has approached Sports Equipment Unlimited and offered to supply the soccer goals at a finished cost of $31.50 per goal. If the company buys rather than manufactures, they will be able to eliminate 60% of fixed manufacturing costs by leasing unused space. The current costs are as follows: Per Unit Direct labor                    200,000                   10.00 Direct materials                    247,000                   12.35 Variable manufacturing overhead                       60,000                     3.00 Fixed manufacturing overhead                    170,000                     8.50 Total manufacturing cost                    677,000                   33.85 INSTRUCTIONS: Prepare an incremental analysis for the decisions to make or buy the soccer goals. Show the cost of continuing to make and to buy the goals. Show the effect on net income if they buy. Should Sports Equipment Unlimited buy the goals? Make-Versus-Buy Decision Sports Equipment Unlimited makes and sells soccer goals and has sales of 20,000 units per year. The plant is operating at full capacity. A potential supplier has approached Sports Equipment Unlimited and offered to supply the soccer goals at a finished cost of $31.50 per goal. If the company buys rather than manufactures, they will be able to eliminate 60% of fixed manufacturing costs by leasing unused space. The current costs are as follows: Per Unit Direct labor                    200,000                   10.00 Direct materials                    247,000                   12.35 Variable manufacturing overhead                       60,000                     3.00 Fixed manufacturing overhead                    170,000                     8.50 Total manufacturing cost                    677,000                   33.85 INSTRUCTIONS: Prepare an incremental analysis for the decisions to make or buy the soccer goals. Show the cost of continuing to make and to buy the goals. Show the effect on net income if they buy. Should Sports Equipment Unlimited buy the goals?

Explanation / Answer

As the total cost under the make alternative is lower by $ 21,000, the company should continue to make the goals, and not should not opt for outsourcing, unless leasing out the idle facilities brings in enough revenues to justify outsourcing.

Note: unavoidable fixed manufacturing cost of $ 68,000 ( $ 170,000 x 0.40) is not relevant to decision making as it does not change between the alternatives.

Make Buy Variable costs of making (20,000 x $ 25.35) $ 507,000 Cost of purchase( 20,000 x 31.50) 630,000 Avoidable fixed cost ( $170,000 x 0.60) 102,000 - Total cost 609,000 630,000

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