Make or Buy? Ledfords is a chain of improvement stores. Suppose Ledfords is tryi

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Make or Buy? Ledfords is a chain of improvement stores. Suppose Ledfords is trying to decide whether to produce its own line of Formica countertops, cabinets, and picnic tables. Assume Ledford would incur the following unit costs in producing its own product lines: Countertops Cabinets Picnic Tables Direct materials per unit $                 15 $          10 $                  25 Direct labor per unit                     10                 5                      15 Variable manufacturing overhead per unit                        5                 2                        6 Rather than making these products, assume that Ledfords could buy them from outside suppliers. Suppliers would charge Ledfords $40 per countertop, $25 per cabinet, and $65 per picnic table. Whether Ledfords makes or buys these products, assume that the company expects the following annual sales: Countertops -- 487,200 at $130 each Cabinets -- 150,000 at $75 each Picnic tables -- 100,000 at $225 each Assume that Ledfords has a production facility with excess capacity that could be used to produce these products with no additional fixed costs. If making is sufficiently more profitable than outsourcing, Ledfords will start production of the new lines of products. The president of Ledfords has asked your consulting group for a recommendation. Requirements 1.) Are the following items relevant or irrelevant in Ledfords's decision to build a new plant that will manufacture its own products? a.) The unit sales price of the countertops, cabinets, and picnic tables (the sales prices that Ledfords charges its customers) b.) The prices outside suppliers would charge Ledfords for the three products if Ledfords decides to outsource the products rather than make them. c.) The direct materials, direct labor, and variable overhead Ledfords would incur to manufacture the three product lines d.) The president's salary 2.) Determine whether Ledfords should make or outsource the countertops, cabinets, and picnic tables. In other words, what is the annual difference in operating income if Ledfords decides to make rather than outsource each of these three products? Make or Buy? Ledfords is a chain of improvement stores. Suppose Ledfords is trying to decide whether to produce its own line of Formica countertops, cabinets, and picnic tables. Assume Ledford would incur the following unit costs in producing its own product lines: Countertops Cabinets Picnic Tables Direct materials per unit $                 15 $          10 $                  25 Direct labor per unit                     10                 5                      15 Variable manufacturing overhead per unit                        5                 2                        6 Rather than making these products, assume that Ledfords could buy them from outside suppliers. Suppliers would charge Ledfords $40 per countertop, $25 per cabinet, and $65 per picnic table. Whether Ledfords makes or buys these products, assume that the company expects the following annual sales: Countertops -- 487,200 at $130 each Cabinets -- 150,000 at $75 each Picnic tables -- 100,000 at $225 each Assume that Ledfords has a production facility with excess capacity that could be used to produce these products with no additional fixed costs. If making is sufficiently more profitable than outsourcing, Ledfords will start production of the new lines of products. The president of Ledfords has asked your consulting group for a recommendation. Requirements 1.) Are the following items relevant or irrelevant in Ledfords's decision to build a new plant that will manufacture its own products? a.) The unit sales price of the countertops, cabinets, and picnic tables (the sales prices that Ledfords charges its customers) b.) The prices outside suppliers would charge Ledfords for the three products if Ledfords decides to outsource the products rather than make them. c.) The direct materials, direct labor, and variable overhead Ledfords would incur to manufacture the three product lines d.) The president's salary 2.) Determine whether Ledfords should make or outsource the countertops, cabinets, and picnic tables. In other words, what is the annual difference in operating income if Ledfords decides to make rather than outsource each of these three products?

Explanation / Answer

Answer for requirement no.1:

a.and c. The unit sales price of the countertops, cabinets, and picnic tables is relavant for the decision making, Because to determine whether the product is contributing or not is assessed considering both selling price and variale costs.

b: Outside selling price is also relavant becasue if the variable cost of producing the products with in the company is to be compared with the outside sppliers price to determine whether it is profitable to produce or to procure from outside.

d:

President's salary is irrelavant. it is not to be considered while taking the decision whether to produce in house or to procure from outside.

Answer for question no.2:

As, there is incremental contribution to the extent of $4,872,000+$1,200,000+1900000=$7,972,000.

Particulars Countertops Cabinets Picnic tables Direct materials per unit 15 10 25 Direct labour per unit 10 5 15 Variable manufacturing overhead 5 2 6 Total variable costs(1) 30 17 46 Outside suppliers(2) 40 25 65 Savings in costs if made in house(3)=(2)-(1) 10 8 19 Number of units sold(4) 487200 150000 100000 Incremental contribution(5)=(4)*(3) 4872000 1200000 1900000

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