Autoway Inc. is a wholesale Winnipeg-based distributor supplying a wide range of moderately priced auto equipment to large chain stores. Autoway manufactures about 40% of these products and the rest are purchased from other manufacturers. One department of Autoway currently manufactures side view mirrors. Autoway has the capacity to make and sell 40,000 pairs of mirrors on an annual basis. This production volume consumes 100% of the department?s capacity of direct labour at available workstations. Following are the selling price and costs associated with Autoway?s mirrors:

Autoway could easily sell 50% more volume but current production capacity is a major constraint. Waterloo based Krueger Company has offered to supply up to 25,000 pairs of mirrors annually at a delivery price of $150 per pair. Autoway?s production manager, Radha Balan, believes that this capacity can be better used by manufacturing high quality floor mats (pack of 4), and has collected the following supporting information:

Autoway uses direct labour-hours as the application base for manufacturing overhead. Included in the manufacturing overhead for the current year is $440,000 of fixed overhead costs, of which 40% is traceable to the plastics department and 60% is allocated to factorywide manufacturing overhead cost. The remaining manufacturing overhead cost is variable with respect to direct labour-hours. The floor mats could be produced with existing equipment and personnel in the moulded plastics department.

For each unit of product that Autoway sells, regardless of whether the product has been purchased or is manufactured in-house, there is an allocated $10 fixed cost per unit for distribution. This $10 per unit is included in the selling and administrative cost for all products. The remaining amount of selling and administrative cost for all products?purchased or manufactured?is variable. The total selling and administrative cost figure for the purchased pairs of mirrors is $18 per unit.

Required:

Your team should discuss and then respond to the following questions. All team members should agree with and understand the answers (including the calculations supporting the answers) and be prepared to report to the class. (Each teammate can assume responsibility for a different part of the presentation.)

1. Determine the number of direct labour-hours per year being used to manufacture mirrors.

2. Compute the contribution margin per unit for

a. Mirrors purchased from outside supplier.

b. Mirrors manufactured in-house

c. Floor mats manufactured in-house.

3. Determine the best combination of production and purchase, and compute the increase in net income that would result from this product mix over current operations.

Transcribed Image Text:

Selling price per pair Cost per box: $188.00 Moulded plastic $ 17.60 Glass 19.80 Direct labour ($15 per hour) Manufacturing overhead Selling and administrative cost Net operating income per pair 41.25 27.50 _37.40 143.55 $ 44.45 Estimated sales volume 75,000 Selling price per floor mat pack $ 90.00 Cost per floor mat pack: Moulded plastic $25.50 Direct labour ($15 per hour) 16.50 Manufacturing overhead 11.00 Selling and administrative cost 16.00 69.00 Net operating income per floor mat pack $ 21.00