Make or buy. O1’ Salt Enterprises produces 1,000 sailboats per year. Although th
ID: 2490534 • Letter: M
Question
Make or buy. O1’ Salt Enterprises produces 1,000 sailboats per year. Although the company currently buys sails for the sailboats (one set of sails per boat), it is considering making sails in some space that it does not currently use. The company purchases each set of sails for $300. It could make the sails for variable costs $250 per set, plus it would allocate $200,000 of fixed costs per year to the sail-making operation. However, this $200,000 is not a differential cost of making sails; it is part of the costs the company already incurs that it would allocate away from sailboat manufacture to sail making. a. Prepare a differential analysis to show whether O1 Salt Enterprises should make or buy the sails. What should you recommend to management? Explain why the $200,000 fixed costs allocated to sail making is or is not relevant to the decision. b. If O1 Salt buys the sails, then it would have unused factory space. Suppose O1’ Salt received an opportunity to rent out this unused factory space for $80,000 per year. Would that affect your recommendation in part a.?
Explanation / Answer
a.
Differential analysis
Recommendation:
Total cost to make alternative is lowered by 50000. Thus net income will be increased by 50000 if the company will make it. Company Should make the sail .
Fixed cost of 200000 is here sunk cost and irrelevant in taking decision. These are going to cost the company whether make or buy . So it is not relevant in taking the decision.
b.
Differential analysis
Recommendation:
Our recommendation are now favoured the buy decision because now total cost of buy in comparison to make is less than 30000.so company should buy it from outside.
Make buy Variable cost(1000×250) 250000 Purchase price(1000×30) 300000 Total cost 250000 300000Related Questions
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