Countertops Cabinets Picnic Tables $ 15 Direct materials per unit Direct labor per unit $ 10 5 $ 25 10 15 Variable manufacturing overhead per unit 5 2
Ledfords is a chain of home improvement stores. Suppose Ledfords is trying to decide whether to produce its own line of Formica countertops, cabinets, and picnic tables. Assume Ledford would incur the following unit costs in producing its own product lines:
Rather than making these products, assume that Ledfords could buy them from outside suppliers. Suppliers would charge Ledfords $40 per countertop, $25 per cabinet, and $65 per picnic table. Whether Ledfords makes or buys these products, assume that the company expects the following annual sales:
• Countertops—487,200 at $130 each
• Cabinets—150,000 at $75 each
• Picnic tables—100,000 at $225 each
Assume that Ledfords has a production facility with excess capacity that could be used to produce these products with no additional fixed costs. If making is sufficiently more profitable than outsourcing, Ledfords will start production of the new line of products. The president of Ledfords has asked your consulting group for a recommendation.
Requirements
- Are the following items relevant or irrelevant in Ledfords’s decision to build a new plant that will manufacture its own products?
a. The unit sales prices of the countertops, cabinets, and picnic tables (the sales prices that Ledfords charges its customers)
b. The prices outside suppliers would charge Ledfords for the three products if Ledfords decides to outsource the products rather than make them
c. The direct materials, direct labor, and variable overhead Ledfords would incur to manufacture the three product lines
d. The president’s salary
2. Determine whether Ledfords should make or outsource the countertops, cabinets, and picnic tables. In other words, what is the annual difference in operating income if Ledfords decides to make rather than outsource each of these three products?
3. Write a memo giving your recommendation to Ledfords’s president. The memo should clearly state your recommendation, along with a brief summary of the reasons for your recommendation.
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