Golf-2-Go, Inc., a manufacturer of motorized carts for golfers, has just received an offer from a supplier to provide 2,000 units of a component used in its main product. The component is a wheel assembly that is currently produced internally. The supplier has offered to sell the wheel assembly for \($115\) per unit. Golf-2-Go is currently using a functional, unit-based costing system that assigns overhead to jobs on the basis of direct labor hours.

The estimated functional-based full cost of producing the wheel assembly is as follows:

Prior to making a decision, the company’s CEO commissioned a special study to see whether there would be any decrease in the fixed overhead costs. The results of the study revealed the following:
2 setups—\($1,800\) each (The setups would be avoided, and total spending could be reduced by \($1,800\) per setup.)
One half-time inspector is needed. The company already uses part-time inspectors hired through a temporary employment agency. The yearly cost of the part-time inspectors for the wheel assembly operation is \($12,300\) and could be totally avoided if the part were purchased.
Engineering work: 615 hours, $20/hr. (Although the work decreases by 615 hours, the engineer assigned to the wheel assembly line also spends time on other products, and there would be no reduction in his salary.)
200 fewer material moves at \($40\) per move

Required:
1. Ignore the special study, and determine whether the wheel assembly should be produced internally or purchased from the supplier.
2. Now, using the special study data, repeat the analysis.
3. Discuss the qualitative factors that would affect the decision, including strategic implications.
4. After reviewing the special study, the controller made the following remark:
“This study ignores the additional activity demands that purchasing would cause.
For example, although the demand for inspecting the part on the production floor decreases, will we not have a need to inspect the incoming parts in the receiving area? Will we actually save any inspection costs?” Is the controller right?
Would this problem be avoided if Golf-2-Go had an activity-based costing system in place?

Transcribed Image Text:

Direct materials $70 Direct labor 30 Variable overhead 10 Fixed overhead 50