Hagerstown Lab Supplies (HLS) is a distributor of equipment to factories that te
ID: 2483387 • Letter: H
Question
Hagerstown Lab Supplies (HLS) is a distributor of equipment to factories that test turbines and
other high-power machinery. HLS manufactures some of its equipment, including several
types of electrical load banks. The company currently manufactures 12,000 inductive load
banks per year, although production levels have varied between 10,000 and 15,000 over the
last five years. The company is considering purchasing the inductive load banks from an
outside supplier.
HLS’s current cost to produce one inductive load bank based on the current budgeted activity
of 12,000 units per year follows:
Direct Material $1,800
Direct Labor 760
Variable Overhead 790
Fixed Overhead 850
TOTAL $4,200
All variable per unit costs will remain at these levels for the output range of 10,000 to 15,000.
Fixed overhead in total will remain at current levels for the output range of 10,000 to 15,000.
An outside vendor has offered the following pricing per inductive load bank based on a fiveyear
contract for a minimum of 60,000 units in total:
Units 10,000 12,500 15,000
Price $3,525 $3,400 $3,300
Freight 200 175 150
TOTAL $3,725 $3,575 $3,450
Total fixed overhead costs would be reduced by 20% if HLS outsourced the inductive load
banks. HLS could generate $1,500,000 income if it were to divert the resources devoted to the
current inductive load banks production if the company decided to buy from the outside
vendor.
Prepare analyses including relevant per unit costs for each alternative (make or buy) for three
volumes of compressor housings:
a) 10,000
b) 12,500
c) 15,000
d) Should HLS outsource the inductive load banks? How does the minimum
quantity of 60,000 units over five years factor into your decision? What other
information would you like to have to make the best decision? Explain and elaborate.
Explanation / Answer
analyses including relevant per unit costs for each alternative:
d)
HLS should outsource the inductive load banks as under each alternative it has saving over its own incurring cost.
The minimum quantity of 60,000 units over five years factor into your decision because for HLS it is the full capacity work for next five years.
The other informations that would be required to make the best decision are :
a) HLS cost to be incurred on outsourcing the inductive load banks.
b) Capacity of the outside suppliers.
c) reliability of the outside suppliers to complete the order throughly for five years.
d) HLS's own supply price to its vendor.
Volume (units per year) 10000 12500 15000 HLS costing per unit $4200 $4200 $4200 Less: Outside price per unit 3725 3575 3450 475 625 750 Less: savings in fixed costs 170 170 170 305 455 580 Alternative benefits 150 120 100 Cost saving on supply price on outsourcing the order for HLS $155 $335 $480Related Questions
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