Quincy Inc. manufactures and sells bakery products and has decided to put a new product on the market: an ice cream cake. The product will be sold in boxes of 24. The price of each box will be $10. The company will use its excess capacity to manufacture the product. The accounting department has decided that it should allocate $100,000 worth of fixed overhead costs to the product.

The accounting department has budgeted the following costs (based on production of 100,000 boxes):

Direct materials (per box).................................$4.00

Direct labour (per box) .....................................2.00

Fixed and variable overhead (per box)...................2.00

Total.........................................................$8.00

Quincy can purchase ice cream units, one of the ingredients, from a dairy company. The dairy company would sell the ice cream units for $1 for 24 units. If Quincy buys the ice cream units from the dairy company, it would reduce direct labour and variable overhead costs by 10%. The direct materials cost would be 20% lower than the original budgeted amount and would not include the cost of the ice cream units purchased from the dairy company.

Instructions

(a) Determine whether Quincy should make or buy the ice-cream units. Explain your decision.

(b) Suppose that sales projections are revised and that Quincy could sell 125,000 boxes instead of 100,000. In such a case, to produce ice cream, it would need to lease a new machine for $10,000 a year. Under these conditions, should Quincy make the ice cream units or buy them from the dairy company? Explain your decision.

(c) Suppose that sales projections are revised and that Quincy could sell 125,000 boxes instead of 100,000, and that it would need to lease the machine. Would it be better off if it makes the ice cream for the first 100,000 boxes and buys the remainder from the dairy company? Explain your decision. Assume the $1 price is available for any volume.

(d) List four qualitative factors that Quincy should consider when determining whether it should make or buy the ice cream units.