2. Best Boards produces wakeboards. Recently, Jim Muller, vice president of oper

Q: 2. Best Boards produces wakeboards. Recently, Jim Muller, vice president of oper

A. B. Profit Model for each option Make in house Buy from Outside Variable Cost Cost to buy from Outside 80 Direct Material 30 Direct Labour 16 Manufacturing Overhead 10 Fixed Cost Factory Equipment lease 110000 110000 Factor Building Rent 290000 290000 Salaries 140000 90000 Total 540056 490080 Sales Reveneue 350 350 Profit -539706 -489730

ID: 2820185 • Letter: 2

Question

2. Best Boards produces wakeboards. Recently, Jim Muller, vice president of operations, received a bid for from an outside manufacturer who offered to produce the boards for a cost of $80 each.

Best Boards’ president asked the company’s accountant, Amy Eckstrom, to investigate whether it makes sense for Best Boards to hire an outside company to produce the wakeboards. The following data has been gathered for analysis.

Make in house

Buy from outside

Variable costs

Cost to buy from outside

$80 per unit

Direct materials

$30 per unit

Direct labor

$16 per unit

Manufacturing overhead

$10 per unit

Fixed costs (annual)

Factory equipment lease

$110,000

$100,000 i

Factory building rent

$290,000

$290,000 ii

Production supervisors salaries

$140,000

$90,000 iii

Sales Revenue

$350 per unit

i The factory equipment lease will continue for several years whether Best Boards makes or buys the wakeboards.

ii The factory building lease covers several years, so this cost will continue whether Best Boards makes or buys the wakeboards.

iii One supervisor must be paid $90,000 per year even if the company buys the product. The other supervisor, who is paid $50,000 per year, can be let go if the company buys the product.

a. Use the data given to create a profit model for each option (Make or Buy).

b. Use the Excel tool Data/What-If Analysis/Goal Seek to find the break-even quantity for each option.

c. Create a cost-volume graph that shows the annual total cost for each option over a volume range of 0 to 5,000 units. (Your graph should look something like the one on textbook pg. 12 except you will have two cost lines instead of a cost line and a revenue line).

d. Use your graph to approximately determine at what volume the Make and Buy Options have the same total cost.