Make versus buy. (J. Watson) Strudwick Ltd. is a distributor of canvas, leather, and synthetic products including backpacks, luggage, and computer carrying cases. It currently manufac- tures approximately 70% of its products, and outsources the remainder. It is reviewing whether it should continue to manufacture or outsource one of its models of nylon laptop carrying cases. This bag is designed to fit widescreen laptops and Strudwick has capacity to produce only 9,000 units per year. It believes it could sell 13,000 if it had sufficient capacity. The selling price and costs for each bag are:

It can purchase the laptop bags for $57 per unit. Strudwick estimates that its total selling costs on the purchased bags would be $7.80 per unit.
Besides the capacity issue, Strudwick believes it could make better use of the production capacity by manufacturing a wheeled hockey goalie bag. It believes it could sell 14,200 of these bags at a price of $99. The costs to manufacture the bag would be:

The company applies its manufacturing overhead on the basis of direct labour-hours.
The manufacturing overhead rate includes $45,000 of factorywide overhead that has been allocated to the product line. The remainder of the manufacturing overhead is variable. The selling and administration cost includes a $6 per unit fixed cost allocation, regardless of whether the product is manufactured or outsourced.
REQUIRED 1. Which products should Strudwick manufacture and/or purchase to maximize operating income?
2. What qualitative factors would impact this decision?LO1

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Selling price Direct materials (nylon) Direct labour ($16/hour) Zippers, handle, inserts Manufacturing overhead Selling and administration Profit per bag $ 6.00 20.00 $88.00 2.00 30.00 9.00 67.00 $21.00