Canarie produces whirlpool tubs. Currently the company uses internally manufactu

Question

Canarie produces whirlpool tubs. Currently the company uses internally manufactured pumps to power water jets. Canarie has found that 40 percent of the pumps have failed within their 12-month warranty period, causing huge warranty costs. Because of the company’s inability to manufacture high-quality pumps, management is considering buying pumps from a reputable manufacturer that also will bear any related warranty costs. Canarie’s unit cost of manufacturing pumps is $76 per unit, which includes $19 of allocated fixed overhead (primarily depreciation of plant and equipment). Also, the company has spent an average of $20 (labor and parts) repairing each pump returned. Canarie can purchase pumps for $85 per pump.

During 2017, Canarie plans to sell 14,800 whirlpools (requiring 14,800 pumps). Determine whether the company should make or buy the pumps.

Determine the total amount of cost savings related to the better alternative.

makebuy

Explanation / Answer

Req 1: Incremental analysis of Buying the Pumps: Incremental savings in cost: Savings in Manufacturing cost (14800 pumps @ 57 per unit) 843600 Add: Savings in Warranty cost (14800 pumps @ 20) 296000 Total savings 1139600 Less: Incremental cost of Buying the pumps (14800 units @ 85) 1258000 Net Decrease in income -118400 Note: Fixed cost of depreciation is a sunk cost hence irrelevant. Hence, the company shall manufacture the pumps itself. Req 2: The total amount of cost savings on manufacturing is $ 118,400

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.