The Ward Company produces gas grills. This? year\'s expected production is 30 co
ID: 2552259 • Letter: T
Question
The Ward Company produces gas grills. This? year's expected production is 30 comma 00030,000 units.? Currently, Ward makes the side burners for its grills. Each grill includes two side burners. Ward?'s management accountant reports the following costs for making the 60 comma 00060,000 burners:
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Cost per Unit
Cost for 60,000 Units
Direct materials
$6.25
$375,000
Direct manufacturing labor
2.40
144,000
Variable manufacturing overhead
0.95
57,000
Inspection, setup, materials handling
6,900
Machine rent
5,000
Allocated fixed costs of plant administration, taxes, and insurance
70,000
Total costs
$657,900
Ward has received an offer from an outside vendor to supply any number of burners Ward requires at
$ 9.50$9.50 per burner. The following additional information is?available:
?(Click to view the? information)Read the requirements
Cost per Unit
Cost for 60,000 Units
Direct materials
$6.25
$375,000
Direct manufacturing labor
2.40
144,000
Variable manufacturing overhead
0.95
57,000
Inspection, setup, materials handling
6,900
Machine rent
5,000
Allocated fixed costs of plant administration, taxes, and insurance
70,000
Total costs
$657,900
.
Requirement 1. Assume that if Ward purchases the burners from the outside? vendor, the facility where the burners are currently made will remain idle. On the basis of financial considerations? alone, should Ward accept the outside? vendor's offer at the anticipated volume of 60 comma 00060,000 ?burners? Show your calculations. ?(If a box is not used in the? table, leave the box? empty; do not enter a? zero.)
Make
Buy
Total relevant costs
Cost per Unit
Cost for 60,000 Units
Direct materials
$6.25
$375,000
Direct manufacturing labor
2.40
144,000
Variable manufacturing overhead
0.95
57,000
Inspection, setup, materials handling
6,900
Machine rent
5,000
Allocated fixed costs of plant administration, taxes, and insurance
70,000
Total costs
$657,900
Explanation / Answer
As the cost of buying is less than making, the company can go for buy, option thereby saving $19,800.
Make buy Variable costs per unit : Direct Material 6.25 Direct Labor 2.40 Variable Manufacturing Overhead 0.95 Total Variable cost per unit 9.60 9.50 Variable Costs for 60,000 units 576000 570000 Fixed Costs: Inspection , setup and material handling 6900 Total Fixed Costs 6900 0 Total Relevant costs 589800 570000 As the faclility will be idle under buy option, the cost of inspection, setup and material handling costs will be zero . As other fixed costs will be incurred under both the options, they are not relevant for decision making.Related Questions
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