Question - Golfers. Inc. (GI) manufactures golf related equipment including golf balls. This year's expected production of golf balls is 30.000 packs (each consisting of four golf balls]. Cost data are as follows:
|
|
Per Pack
|
80,000 Packs
|
|
Product costs directly traceable to balls:
|
|
|
|
Direct materials
|
$2.60
|
$208,000
|
|
Direct labour
|
1.00
|
80,000
|
|
Variable manufacturing overhead
|
0.15
|
12,000
|
|
Fixed manufacturing overhead
|
|
95,200
|
|
General allocated overhead
|
|
23,200
|
|
|
|
418,400
|
The full cost of one pack of golf balls is 55.23. GI has received an offer from an outside supplier to supply any desired quantity of balls at a price of 55.45 per pack of four golf balls. The cost accounting department has provided the following information:
a. The direct fixed manufacturing overhead is the cost of leasing the machine that stamps out the balls. The machine can produce a maximum of 500,000 balls per year. If the balls are bought, the machine will no longer be needed.
b. No other costs will be affected.
Required:
1. Prepare an analysis showing whether GI would be better off making or buying the balls at a projected volume of 80,000 packs (320,000 golf balls).
2-a. At what volume would GI be indifferent between making and buying?
2-b. What does the indifference point indicate?
3. Select the quantitative and/or qualitative factors that GI should consider before making the final decision.
Possibility of interruptions in supply.
Current price and changes in price.
Alternative use for facilities freed up.
Ability to maintain quality of tennis balls.
Any labour or production issues that may happen.
Change in management structure.
Climatic conditions in area where plant is situated.