TBI Ltd. makes tennis balls and other tennis-related items. This year?s expected production of tennis balls is 10,000 tins (each consisting of three tennis balls). Cost data are as follows:

The full cost of one tin of tennis balls is $5.50 per unit. TBI has received an offer from an outside supplier to supply any desired quantity of balls at a price of $4.10 per tin of three tennis balls. The cost accounting department has provided the following information:

a. Costs of direct materials, direct labour, and variable overhead will be saved if the balls are purchased from outside.

b. The direct fixed manufacturing overhead is the cost of leasing the die machine that stamps out the balls. The machine can produce a maximum of 60,000 balls per year. If the balls are bought, the machine will no longer be needed.

c. No other costs would be affected.

Required:

1. Prepare an analysis showing whether TBI would be better off making or buying the balls at a projected volume of 10,000 tins (30,000 tennis balls).

2. At what volume would TBI be indifferent between making and buying? What does the indifference point indicate?

3. State two other factors, either quantitative or qualitative, that TBI should consider before making the final decision.

Transcribed Image Text:

Per Tin 10,000 Tins Product costs directly traceable to balls: Direct materials Direct labour.... Variable manufacturing overhead .. Fixed manufacturing overhead Common costs allocated to this product line. $2.00 1.00 0.75 $20,000 7,500 2,500 15,000 55,000