Logan Company manufactures several toy products. One is a large plastic truck. which requires a plastic truck body, two metal axles, and four rubber wheels. Logan presently manufactures and assembles all the parts.

Another toy company has offered to sell the parts to Logan at $\$ 1.70$ per truck if 20,000 or more parts are purchased each year, and at $\$ 2$ per truck if less than 20,000 parts are purchased. Logan is considering this offer. The space used in producing the parts could be used for a new toy, which is scheduled to begin production next year. If Logan continues to produce the parts for the plastic truck, the company will have to lease space from another company in an adjacent building to produce the new toy. The rent would be $\$ 8,000$ per year Other information related to the truck is:

The marketing department has estimated that sales for the plastic truck will be approximately 16,000 units per year for the next three years. The fixed manufacturing overhead is indirect and will still be incurred regardless of which decision is made.
Required:
1. Describe Logan Company's two alternatives for this decision 2. What costs are relevant to the decision?
3. Which alternative should Logan Company select?
4. What would be the best decision had Logan not planned to produce the new toy?
5. Interpretive Question: What are some of the qualitative factors that Logan Company might consider in making the decision?

Transcribed Image Text:

Produce Assemble Parts Truck Total Direct materials $1.10 $0.20 $1.30 Direct labor 0.30 0.20 0.50 Variable manufacturing overhead. 0.20 0.15 0.35 Fixed manufacturing overhead.. 0.20 0.40 0.60 Total manufacturing costs....... $1.80 $0.95 $2.75