Tanner Appliance Company manufactures 12,600 units of part M4annually. The part

Question

Tanner Appliance Company manufactures 12,600 units of part M4annually. The part is used in the production of one of itsprincipal products. The following unit cost information isavailable on part M4: Directmaterials              $11 Directlabor                      9 Unit relatedsupport          4 Batch relatedsupport         5 Product sustaining support   2 Facility sustaining support     2 Allocated corporate support 5 Totalcosts                          $38 A potential supplier has offered to manufacture this part forTanner Appliance for $30 per unit. Ifr Tanner Applianceoutsources the production of part M4, 50% of batch related and 80%of product sustaining resources can be eliminated. Furthermore, the production facility now being used to produce thispart can be used for a fast-growing new product line that wouldotherwise require the use of a neighboring facility at a rentalcost of 20,000 per year. a. Should Tanner Appliance purchase part M4 from theoutside supplier? b. What costs are relevant for this decision? c. What additional factors should Tanner consider? Tanner Appliance Company manufactures 12,600 units of part M4annually. The part is used in the production of one of itsprincipal products. The following unit cost information isavailable on part M4: Directmaterials              $11 Directlabor                      9 Unit relatedsupport          4 Batch relatedsupport         5 Product sustaining support   2 Facility sustaining support     2 Allocated corporate support 5 Totalcosts                          $38 A potential supplier has offered to manufacture this part forTanner Appliance for $30 per unit. Ifr Tanner Applianceoutsources the production of part M4, 50% of batch related and 80%of product sustaining resources can be eliminated. Furthermore, the production facility now being used to produce thispart can be used for a fast-growing new product line that wouldotherwise require the use of a neighboring facility at a rentalcost of 20,000 per year. a. Should Tanner Appliance purchase part M4 from theoutside supplier? b. What costs are relevant for this decision? c. What additional factors should Tanner consider?

Explanation / Answer

Make Part M4 Buy Part M4 Cost of Purchase from outside supplier 12,600 units x $30 $378,000 Cost to make Direct materials 12,600 units x $11 $138,600 Direct labor 12,600 units x $9 $113,400 Unit related support 12,600 units x $4 $50,400 Batch related support 12,600 units x $5 $63,000 $31,500 Product sustaining support   12,600 units x $2 $25,200 $5,040 Facility sustaining support 12,600 units x $2 $25,200 $25,200 Allocated corporate support 12,600 units x $5 $63,000 $63,000 Rental cost savings ($20,000) Total $478,800 $482,740 a. Should Tanner Appliance purchase part M4 from theoutside supplier? From the above cost analysis it appears that Tanner Appliancesshould make part M4. It will result in cost savings $3,940. ____________________________________________________________________________________________ b. What costs are relevant for this decision? b. What costs are relevant for this decision? The costs(and cost savings) that has differences between the twoalternatives are relevant for this decision. That is, directmaterial, direct labor, unit-related support, differentialbatch-related support, differential product-sustaining support, andsavings in rental costs are relevant for thisdecision. _________________________________________________________________________________ c. What additional factors should Tanner consider? In deciding whether to purchase part M4from the outside supplier, Tanner should consider factors such asthe supplier’s reliability in maintaining quality and on-timedelivery, and permanence of the offeredprice.
Make Part M4 Buy Part M4 Cost of Purchase from outside supplier 12,600 units x $30 $378,000 Cost to make Direct materials 12,600 units x $11 $138,600 Direct labor 12,600 units x $9 $113,400 Unit related support 12,600 units x $4 $50,400 Batch related support 12,600 units x $5 $63,000 $31,500 Product sustaining support   12,600 units x $2 $25,200 $5,040 Facility sustaining support 12,600 units x $2 $25,200 $25,200 Allocated corporate support 12,600 units x $5 $63,000 $63,000 Rental cost savings ($20,000) Total $478,800 $482,740

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