Question 3 Aquarius Limited manufactures bicycles. This year's expected production is 10,000 units. Currently, Aquarius makes the chains for its bicycles. Aquarius' management accountant reports the following costs for making the 10,000 bicycle chains: Cost per unit $4.00 $2.00 Costs for 10,000 units $40,000 20,000 $1.50 15,000 Direct materials Direct manufacturing labour Variable manufacturing overhead (power and utilities) Inspection, setup, materials handling Machine rent Allocated fixed costs of plant administration, taxes and insurance TOTAL COSTS 2,000 3,000 30,000 $110,000 Aquarius has received an offer from an outside vendor to supply any number of chains Aquarius requires at $8.20 per chain. The following additional information is available: - Inspection, setup and materials handling costs vary with the number of batches in which the chains are produced. Aquarius produces chains in batch sizes of 1,000 units. Aquarius will produce the 10,000 units in 10 batches. - Aquarius rents the machine used to make the chains. If Aquarius buys all its chain from the outside vendor, it does not need to pay rent on this machine. Required (show your workings for calculations & write in your own words): (a) Assume that if Aquarius purchases the chains from the outside vendor, the facility where the chains are currently made will remain idle (i.e. not used). On the basis of financial factors alone, should Aquarius accept the outside vendor's offer at the anticipated production (and sales) volume of 10,000 units? (6 points) (b) Explain two (2) qualitative factors that Aquarius should consider in making the above decision. (4 points) Question 3 Aquarius Limited manufactures bicycles. This year's expected production is 10,000 units. Currently, Aquarius makes the chains for its bicycles. Aquarius' management accountant reports the following costs for making the 10,000 bicycle chains: Cost per unit $4.00 $2.00 Costs for 10,000 units $40,000 20,000 $1.50 15,000 Direct materials Direct manufacturing labour Variable manufacturing overhead (power and utilities) Inspection, setup, materials handling Machine rent Allocated fixed costs of plant administration, taxes and insurance TOTAL COSTS 2,000 3,000 30,000 $110,000 Aquarius has received an offer from an outside vendor to supply any number of chains Aquarius requires at $8.20 per chain. The following additional information is available: - Inspection, setup and materials handling costs vary with the number of batches in which the chains are produced. Aquarius produces chains in batch sizes of 1,000 units. Aquarius will produce the 10,000 units in 10 batches. - Aquarius rents the machine used to make the chains. If Aquarius buys all its chain from the outside vendor, it does not need to pay rent on this machine. Required (show your workings for calculations & write in your own words): (a) Assume that if Aquarius purchases the chains from the outside vendor, the facility where the chains are currently made will remain idle (i.e. not used). On the basis of financial factors alone, should Aquarius accept the outside vendor's offer at the anticipated production (and sales) volume of 10,000 units? (6 points) (b) Explain two (2) qualitative factors that Aquarius should consider in making the above decision. (4 points)
