The following production costs are provided for Glenislay Co., a manufacturer of

ID: 2475406 • Letter: T

Question

The following production costs are provided for Glenislay Co., a manufacturer of high quality headphones. Manufacturing Costs are as follows: Direct Materials $40, Direct Labor $25, Variable Overhead $15, Fixed Overhead $30 for a Total of $110. It has been determined that the headphones could be purchased from Integrated Labs at a cost of $90 plus $5 shipping costs. Considering the offer from Integrated Labs, show whether Glenislay should make or buy the product. (a.) Assume 40% of fixed overhead allocated to making headphones relates to a production manager who would not be retained if the headphones were not produced by Glenislay. (b.) How would your analysis change if Glenislay could use capacity resources for alternative activities that would produce a contribution of $27 per unit? (c.) What is your understanding of the term outsourcing. Briefly explain.

Explanation / Answer

(a)

Make

Buy

Difference

Direct materials @40

Direct labor @25

Variable overhead @15

Fixed overhead

Purchase @95

(95)

total

110

113

(3)

Loss of $3 on buying hence it should make the headphones

(b)

Total cost of buying

($113)

Contribution

Cost of buying

Cost of making 110 and cost of buying is 86 hence there is saving in cost of $24