Question
Ergo Products manufactures a variety of ergonomic household tools including a cordless drill. The cordless drill comes with a battery recharger. Currently, the company manufactures
Ergo Products manufactures a variety of ergonomic household tools including a cordless drill. The cordless drill comes with a battery recharger. Currently, the company manufactures its own recharger for the drill with the following unit costs:
Direct materials | $3.00 |
Direct labor | $3.00 |
Variable overhead | $1.00 |
In addition, when 5,000 rechargers are produced each year, Ergo applies $2 of fixed overhead costs to each recharger. Another manufacturer has offered to supply Ergo with a recharger at a cost of $8 each. If Ergo accepts the offer, 80% of the fixed overhead allocated to the rechargers will be avoidable.
A. | List at least two qualitative factors that Ergo Products should consider in this make or buy decision. |
B. | What is the relevant cost of each recharger if they make it themselves? |
C. | What is the relevant cost of each recharger if they outsource? |
D. | From a quantitative basis, should they make or buy the rechargers? By what amount will the company's net income increase or decrease if they outsource? |
* * * * Please organize your answer by schedule * * *
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