Chapter 8 - Homework Hints PDF

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Chapter 8 Homework Hints: Exercise 8-4 and 8-6: Davis Video in problem Exercise 8-9: Outsourcing (LO 3) Steeple Rides makes bicycles. It has always purchased its bicycle tires from the Balyo Tires at $15 each but is currently considering making the tires in its own factory. The estimated costs per unit of making the tires are as follows: Direct materials $4 Direct labor $5 Variable manufacturing overhead $2 The company's fixed expenses would increase by $38,000 per year if managers decided to make the tire. Required: a) Ignoring qualitative factors, if the company needs 8,000 tires a year, should it continue to purchase them from Balyo or begin to produce them internally? b) What qualitative factors should Steeple Rides consider in making this decision?

Exercise 8-9 Solution: a. Make Direct materials Direct labor Variable overhead Relevant cost per unit to make Cost to buy Units needed Total variable cost Additional fixed costs to make Total cost

Buy $ 4 5 2 $11

 8,000 $ 88,000 38,000 $126,000

The company should continue to purchase the tires.

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$15  8,000 $120,000 $120,000

b.

Qualitative factors to consider include:   

the quality of the purchased tires as compared to those it could make the relationship with the supplier of the tires – consistent, timely delivery of tires and future price increases the strain on the manufacturing facility by adding additional production

Problem 8-24 Outsourcing (LO 3) Wright Water Co. is a leading producer of greenhouse irrigation systems. Currently, the company manufactures the timer unit used in each of its systems. Based on an annual production of 50,000 timers, the company has calculated the following unit costs. Direct fixed costs include supervisory and clerical salaries and equipment depreciation. Direct materials $13 Direct labor 5 Variable manufacturing overhead 4 Direct fixed manufacturing overhead 7 (40% salaries, 60% depreciation) Allocated fixed manufacturing overhead 8 Total unit cost $37 Clifton Clocks has offered to provide the timer units to Wright at a price of $34 per unit. If Wright accepts the offer, the current timer unit supervisory and clerical staff will be laid off. Required: a) Assuming that Wright Water has no other use for either the facilities or the equipment currently used to manufacture the timer units, should the company accept Clifton's offer? Why or why not? b) Assume that if Wright Water accepts Clifton's offer, the company can use the freed-up manufacturing facilities to manufacture a new line of growing lights. The company estimates it can sell 100,000 of the new lights each year at a price of $12. Variable costs of the lights are expected to be $7 per unit. The timer unit supervisory and clerical staff would be transferred to this new product line. Should Wright Water accept Clifton's offer? Why or why not?

Problem 8-24 solution: 2

a. Make $13.00 5.00 4.00 2.80 $24.80

Direct materials Direct labor Variable overhead Fixed overhead salaries ($7 × 40%) Relevant cost per unit to make Cost to buy Units needed Total cost

Buy

 50,000 $1,240,000

$34  50,000 1,700,000

Do not accept Clifton’s offer. It is cheaper for Wright to make the units.

b. Make Direct materials Direct labor Variable overhead Relevant cost per unit to make Cost to buy Units needed Total cost Contribution margin from alternative use of facilities (($12 $7)  100,000 units) Net cost

Buy $13 5 4 $22

 50,000 $1,100,000

Do not accept Clifton’s offer. It is still cheaper for Wright to make the units.

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$34  50,000 $1,700,000 (500,000) $1,200,000...