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Make or Buy? Ledfords is a chain of improvement stores. Suppose Ledfords is trying to decide whether to produce its own line of Formica countertops,
Make or Buy? | ||||||||||
Ledfords is a chain of improvement stores. Suppose Ledfords is trying to decide whether to produce its own line of Formica countertops, | ||||||||||
cabinets, and picnic tables. Assume Ledford would incur the following unit costs in producing its own product lines: | ||||||||||
Countertops | Cabinets | Picnic Tables | ||||||||
Direct materials per unit | $ 15 | $ 10 | $ 25 | |||||||
Direct labor per unit | 10 | 5 | 15 | |||||||
Variable manufacturing overhead per unit | 5 | 2 | 6 | |||||||
Rather than making these products, assume that Ledfords could buy them from outside suppliers. Suppliers would charge Ledfords $40 per | ||||||||||
countertop, $25 per cabinet, and $65 per picnic table. Whether Ledfords makes or buys these products, assume that the company | ||||||||||
expects the following annual sales: | ||||||||||
Countertops -- 487,200 at $130 each | ||||||||||
Cabinets -- 150,000 at $75 each | ||||||||||
Picnic tables -- 100,000 at $225 each | ||||||||||
Assume that Ledfords has a production facility with excess capacity that could be used to produce these products with no additional | ||||||||||
fixed costs. If making is sufficiently more profitable than outsourcing, Ledfords will start production of the new lines of products. The | ||||||||||
president of Ledfords has asked your consulting group for a recommendation. | ||||||||||
Requirements | ||||||||||
1.) | Are the following items relevant or irrelevant in Ledfords's decision to build a new plant that will manufacture its own products? | |||||||||
a.) | The unit sales price of the countertops, cabinets, and picnic tables (the sales prices that Ledfords charges its customers) | |||||||||
b.) | The prices outside suppliers would charge Ledfords for the three products if Ledfords decides to outsource the products rather than | |||||||||
make them. | ||||||||||
c.) | The direct materials, direct labor, and variable overhead Ledfords would incur to manufacture the three product lines | |||||||||
d.) | The president's salary | |||||||||
2.) | Determine whether Ledfords should make or outsource the countertops, cabinets, and picnic tables. In other words, what is the | |||||||||
annual difference in operating income if Ledfords decides to make rather than outsource each of these three products? | ||||||||||
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