Question
Part 2: Assume that Falco Inc., as described in part 1 currently purchases the chair cushions for its lawn furniture from an outside vender for
Part 2:
Assume that Falco Inc., as described in part 1 currently purchases the chair cushions for its lawn furniture from an outside vender for $15 per set. Falcos chief operations officer wants an analysis of the comparative costs of manufacturing these cushions to determine whether bringing the manufacturing in-house would save the company money. Additional information shows that if Falco were to manufacture the cushions, the direct materials cost would be $6 and the direct labor costs would be $4 per set. In addition, to produce the cushions, Falco would have to purchase the cutting and sewing equipment, which would add 10,000 to annual fixed costs.
Required:
- What is the total relevant cost per year to purchase the chair cushions from the outside vendor?
- What is the total relevant cost per year to produce the chair cushions internally?
- What is the estimated net annual effect on operating income of producing the cushions internally rather than purchasing the cushions from the external supplier?
- What strategic factors bear on the decision facing Falco?
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