QUESTION V (5 Marks)

Tony Hawk Inc. (Hawk) is a wholesale distributor supplying moderately priced sporting equipment to large chain stores. Hawk manufacturers and sells 20,000 tackle boxes annually, making full use of its direct labour capacity at available workstations. Following are the selling price and costs associated with Hawks tackle boxes:

Selling price per box $86.00

Costs per box:

Direct material $17.00

Direct labour 18.75

Fixed manufacturing overhead:

Depreciation on equipment ($65,000 / 20,000) 3.25

Production supervisors salary ($185,000 / 20,000) 9.25

Selling and administrative costs 17.00 65.25

Profit per box $20.75

The company has looked into the possibility of outsourcing the tackle boxes. A supplier of high quality products has approached Hawk and would be able to provide up to 20,000 tackle boxes per year at a price of $54 per box delivered to Hawks facility.

The selling and administrative costs include $120,000 fixed cost for distribution of the product. Every unit of product that Hawk sells, whether outsourced or manufactured is allocated $6 of this fixed distribution cost. The remainder of the selling and administrative cost would be saved if the tackle boxes were outsourced.

REQUIRED:

Determine whether Tony Hawk Inc. should accept the suppliers offer to provide 20,000 tackle boxes at $54 per box.