Question
Elbow Industries Inc., a manufacturer, converts unfinished pipe into a usable state by perforating and threading it for use in plumbing before selling it to
Elbow Industries Inc., a manufacturer, converts unfinished pipe into a usable state by perforating and threading it for use in plumbing before selling it to customers. The company typically manufactures 100,000 units of standard finished pipe per year and uses that amount for its per-unit cost estimates.
The company received a one-time order for 50 units of custom finished pipe. The company can fill this order by manufacturing unfinished pipe in-house or by purchasing finished pipe. The controller provided cost information related to the custom order below.
Elbow Industries Inc. Cost Elements for Make vs. Buy Analysis |
|
Cost Element | Cost per unit |
Cost to purchase finished pipe for the custom order | 120 |
Threading labor | 65 |
Perforating labor | 45 |
Depreciationmachine (straight-line, five-year life) | 5 |
Depreciationbuilding allocation to manufacturing | 6 |
Inspection | 50 |
Insurance on machinery | 4 |
Plant managers salaries | 8 |
If the company finished the pipe in-house for the custom order, it will use the same facility and machinery as the standard products manufactured with no additional capacity required.
If the company purchases finished pipe for the custom order, it will need to perform an in-house inspection for quality control. No inspection is necessary for units that are finished in-house.
A
- Calculate the fixed overhead cost per unit of standard finished pipe manufactured.
- Calculate the relevant cost per unit to fulfill the custom order by manufacturing the finished pipe
- Calculate the relevant cost per unit to fulfill the custom order by manufacturing the finished pipe
B
Prior to the decision, the customer contacted Elbow to accelerate the completion date of the order. In order to meet the new deadline by manufacturing, the company would use additional labor totaling $1,200. With both approaches, Elbow would incur $800 to expedite the shipping of the completed pipes to the customer. These are the only additional costs that will be incurred to meet the new deadline. The controller asked you to update the make-versus-buy analysis for the order as a result of the new deadline.
- Calculate the additional cost per unit to manufacture the pipe that is relevant to the make-versus-buy decision.
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