PRACTICE PROBLEM 2 Best Gardening Ltd produces mowers. This year's expected production is 10,000 units. Currently, Best Gardening makes the grass catcher bags for its mowers. Best Gardening's management accountant reports the following costs for making the 10,000 grass catcher bags per year Cost per Costs for 10,000 units $100,000 unit $10.00 Direct materials Direct manufacturing labour Variable manufacturing overhead (power and utilities) Inspection, set-up, materials handling Depreciation sewing machine Supervisor's salary Allocated fixed costs of plant administration Total costs 5.00 50,000 2.50 25.000 2,000 2.000 20,000 10,000 $209,000 Best Gardening has received an offer from an outside vendor to supply any number of grass catcher bags Best Gardening requires at $21.50 per bag. The following additional information is available: a) Inspection, set-up and materials-handling costs vary with the number of batches in which the catcher bags are produced. Best Gardening produces catcher bags in batch sizes of 500 units. Best Gardening will produce the 10,000 units in 20 batches. b) Best Gardening uses the sewing machine to make the catcher bags. If Best Gardening buys all of its catcher bags from the outside vendor, Best Gardening does not need the sewing machine and the machine would be sold for $10,000. In addition, if Best Gardening does not continue producing catcher bags, the supervisor's salary is avoidable. Questions 1. Assume that if Best Gardening purchases the catcher bags from the outside vendor, the facilities where the catcher bags are currently made will be used to upgrade the mowers by adding edge cutters. As a consequence, the selling price of mowers will be increased by $50. The variable cost per unit of the upgrade would be $45, and additional tooling costs of $40,000 would be incurred. On the basis of financial considerations alone, should Best Gardening make or buy the catcher bags, assuming that 10,000 mowers are produced (and sold)? Why? Use comparative analysis in your answer. 2. The sales manager at Best Gardening is concerned that the estimate of 10,000 units may be too high and believes that only 8,000 units will be sold. Production will be cut back freeing up work space. This space can be used to add the edge cutters whether Best Gardening buys the catcher bags or makes them in-house. At this lower output, Best gardening will produce the catcher bags in 16 batches of 500 units each. On the basis of financial considerations alone, should Best Gardening purchase the catcher bags from the outside vendor? Show your calculations. 3. The management accountant of Best Gardening said "variable costs are and fixed costs always relevant, are always irrelevant" Do you agree? Why