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Make-Versus-Buy Decision Sports Equipment Unlimited makes and sells soccer goals and has sales of 20,000 units per year. The plant is operating at full capacity.
Make-Versus-Buy Decision | |||
Sports Equipment Unlimited makes and sells soccer goals and has sales of 20,000 units per year. The plant is operating at full capacity. | |||
A potential supplier has approached Sports Equipment Unlimited and offered to supply the soccer goals at a finished cost of $31.50 | |||
per goal. If the company buys rather than manufactures, they will be able to eliminate 60% of fixed manufacturing costs by leasing | |||
unused space. The current costs are as follows: | |||
Per Unit | |||
Direct labor | 200,000 | 10.00 | |
Direct materials | 247,000 | 12.35 | |
Variable manufacturing overhead | 60,000 | 3.00 | |
Fixed manufacturing overhead | 170,000 | 8.50 | |
Total manufacturing cost | 677,000 | 33.85 | |
INSTRUCTIONS: | |||
Prepare an incremental analysis for the decision to make or buy the soccer goals. | |||
Show the cost of continuing to make and to buy the goals. Show the effect on net | |||
income if they buy. Should Sports Equipment Unlimited buy the goals? | |||
Change in | |||
Make | Buy | Net Income | |
Direct labor | - | #VALUE! | |
Direct materials | - | #VALUE! | |
Variable manufacturing overhead | - | #VALUE! | |
Fixed manufacturing overhead | #VALUE! | #VALUE! | |
Purchase cost | 630,000 | #VALUE! | |
Total manufacturing cost | - | #VALUE! | #VALUE! |
Sports Unlimited should continue to manufacture the goals, even though the unit cost is higher than | |||
the purchase price. This is true because there will be some remaining fixed costs even if they buy. | |||
As we see, the net income will fall by $21,000 if Lancaster buys the goals. |
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