Question 4 - 15 marks

Hidef Electronics manufactures a digital flat screen TV which includes an MP3 player. Its current costs of manufacturing the needed 100,000 MP3 players per month are:

Direct materials$540,000

Direct labour...140,000

Variable manufacturing overhead100,000

Fixed manufacturing overhead 200,000

Total manufacturing costs$980,000

Another manufacturer offers to sell Hidef the needed 100,000 MP3 players per month for $7 per unit on as flexible a delivery schedule as Hidef wants. Hidef expects to reduce fixed overhead by $30,000 per month if MP3 players are purchased from the outside supplier. If the MP3 players are purchased Hidef will pay $0.50 per unit to transport the MP3 players to its manufacturing plant, where it will add its own logo at a cost of $0.10 per player.

No alternative use is available for the unused capacity if MP3 players are purchased rather than manufactured. Prepare an analysis to show whether Hidef should make or buy the MP3 players.