Hart Company currently manufactures lawnmowers. It currently produces 10,000 bla

Question

Hart Company currently manufactures lawnmowers. It currently produces 10,000 blades each year that it installs in the mowers. Hart has calculated the following costs for making each blade:

Unit-level costs:

Material         $2.00

Labor              2.80

Overhead            .20

In addition to the unit level costs, Hart pays an annual lease of $30,000 (Fixed Facility-Level Cost) for the mower factory. It also spends $15,000 each year on advertising for its mowers.

Hart is considering outsourcing the manufacturing of blades to a supplier who has offered to sell 10,000 blades to Hart for $5.40 each.

a) Prepare an analysis that indicates whether outsourcing should be accepted or rejected.

b) How would Hart’s decision about outsourcing be effected if it was able to rent the factory space that would become idle for $10,000 per year? Show computations that support your answer.

Explanation / Answer

**Factory lease rent and advertising cost will continue to incur even if outsourcing is done thus irrelevant .

outsourcing should be rejected s incrmental cost is " 4000

b)Then there will be an incremental income of = 10000 - 4000 = $ 6000.

so outsourcing should be done

Incremetal savings /(cost) savings in unit level cost (2+2.8+.2) = 5 * 10000 50000 Incremental cost   (10000 * 5.4 ) = - 54000 Incremental cost -4000

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