Magic Lawnmower Company assembles lawnmowers from a number of different parts. S

Question

Magic Lawnmower Company assembles lawnmowers from a number of different parts. Some of those parts are manufactured by Magic Lawnmower and some of the parts are purchased from other companies. The vendor for the blades that Magic Lawnmower uses has just increased the price of blades to $10 per blade for the first 5,000 blades and $9 per blade for all blades ordered during the year in excess of 5,000. Magic Lawnmower expects to use 7,500 blades this year. Magic lawnmower can make the blades for the following unit costs: Direct materials $3.50 Direct labor $1.75 Variable manufacturing overhead $4.25 Should Magic Lawnmower make the blades or continue to buy the blades from its vendor?

Explanation / Answer

Information given:-

a) Vendor's price of blade for first 5000 blades = $10/blade

b) Vendor's price of blade for any excess blades = $9/blade

c) Magic Lawnmower expects to use = 7500 blades this year

If Magic Lawnmower make the blades on its own then:-

d) Direct Material cost = $3.50 / blade

e) Direct Labor cost = $1.75 / blade

f) Variable manufacturing overhead = $4.25

Case 1:- Ordering on Vendor:- The price Magic Lawnmower would pay for 7500 blades using information from sr. no. a and b = $10x 5000+ $9x2500 = $72500

Case 2:- Self Manufacturing:- The cost of manufacturing 7500 blades on its own at Magic Lawnmower using information from sr. no d, e and f. Since direct cost of material and labout are per unit, it could be added to variable manufacturing overhead cost per unit hence total cost per unit is sum of direct material cost+direct labor cost+variable manufacturing overhead cost = ($3.5+ $1.75+ $4.25) = $9.5

Total cost of manufacturing 7500 blades = $9.5 x 7,500 = $71,250

Since total cost of manufacturing 7500 blades on its own by Magic Lawnmower is less than the price it would pay for 7500 blades to vendor, therefore Magic Lawnmower should make the blades rather than buy from its vendor. However Magic Lawnmover should reevaluate its decision if the number of blades required is higher than 7500 blades, suppose higher than 10000 blades.

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