APPLY THE CONCEPTS 1. Which one of the following items would be considered relevant in a particular product line's make-or-buy outsourcing decision: Check all that apply A sales manager bonus expense that will be incurred whether the production is outsourced or continues in-house O Depreciation on plant machinery that was purchased the previous year Leased machine rent where the lease can be broken without penalty if the associated production is outsourced Corporate advertising expense that will be allocated to the product line regardless of whether the associated production is outsourced or continues in-house Points | 1/1 The Heavy Breezes Hotel & Spa located in Hanalei, Hawaii currently provides a complementary massage to each of its 40,000 annual guests. An average of 25 percent of its guests accept the offer and receive a massage. However, a small startup venture in the same village recently offered to provide a massage to each of Heavy Breezes' guests for a fee to Heavy Breezes of $100 per massage. Heavy Breezes accounting team has prepared the following list of costs it incurs to provide its guests with massages: Total Cost Unit Cost Direct materials (towels, water) $80,000 $8 Direct labor (masseuse time) $900,000 S90 Variable overhead (oils, lotions) $50,000 S5 Fixed overhead (physical facility in hotel) $500,000 $50 Total $1,530,000 $153 Fixed overhead will continue whether the massages are provided internally by Heavy Breezes personnel or externally by the startup venture. No additional costs beyond the $100 will be incurred if Heavy Breezes uses the new startup venture to provide the guest massages. Heavy Breezes management must determine if it would be cheaper to provide the guest massages internally or externally. Senior management wants customers to retain a consistent experience, and a combination of using internal resources and outsourcing to provide the massage service is not an option Required: Required: 1. What are the alternatives that are being considered for Heavy Breezes massages. Check all that apply. O A combination of using internal Heavy Breezes' resources and the external startup venture company Continue to provide guest massages internally using Heavy Breezes' resources Purchase the massages for guests externally by using the new startup venture company Points 1/1 2. List the relevant cost(s) (in total costs) of internally provided massages and of externally provided massages. Enter all amounts as positive numbers. Alternatives Differential Make Buy Cost to Make Direct materials $ $ Direct labor $ $ Variable overhead $ $ Purchase cost $ $ Total relevant cost $ $ $ Points 0/11 3. Which alternative is more cost effective and by how much? It is less expensive by $ to purchase (or outsource) the guest massages. Points 2/3 4. Assume that the direct labor costs of providing the service internally now changed to $800,000 instead of the original estimate of $900,000. Senior management also believes that there is a possibility that Heavy Breezes can provide a different health treatment to its existing customers using the existing facility in which they plan to provide the massage service. This health treatment should bring in an incremental profit of $200,000 for Heavy Breezes
