FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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6. Brees, Inc., a manufacturer of golf carts, has just received an offer from a supplier to provide 2,500 units of a component used in its main product. The component is a track assembly that is currently produced internally. The supplier has offered to sell the track assembly for $66 per unit. Brees is currently using a traditional, unit-based costing system that assigns
| Direct materials | $40.00 |
| Direct labor | 16.00 |
| Variable overhead | 5.00 |
| Fixed overhead | 40.00 |
Prior to making a decision, the company’s CEO commissioned a special study to see whether there would be any decrease in the fixed overhead costs. The results of the study revealed the following:
3 setups—$1,180 each (The setups would be avoided, and total spending could be reduced by $1,180 per setup.)
One half-time inspector is needed. The company already uses part-time inspectors hired through a temporary employment agency. The yearly cost of the part-time inspectors for the track assembly operation is $11,730 and could be totally avoided if the part were purchased.
Engineering work: 450 hours, $45/hour. (Although the work decreases by 450 hours, the engineer assigned to the track assembly line also spends time on other products, and there would be no reduction in his salary.)
75 fewer material moves at $30 per move.
Required:
1. Ignore the special study, and determine whether the track assembly should be produced internally or purchased from the supplier.
2. Now, using the special study data, repeat the analysis.
It is ________ expensive to buy outside.
3. Which of the listed items is not a qualitative factor that would affect the decision?
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