In today's fast-paced business environment, decision making is a critical task for managers. Making the right decisions is vital to the success of a company, and it requires access to relevant information. Cari Pump (CP) Company manufactures water pumps. An important part of the pump is its electronic component (EC). Cari Pump collects data with the following cost information about the costs of making ECs in 2019 and the expected costs in 2020: Current Costs (2019) Expected Costs (2020) Fixed manufacturing cost Fixed manufacturing overhead costs that can be avoided if ECs are not made 360,000 360,000 Fixed manufacturing overhead costs of plant depreciation, insurance, and administration that cannot be avoided even if ECs are not made 850,000 850,000 Variable manufacturing costs Direct material cost per EC $ 200 $ 190 Direct manufacturing labor cost per EC 60 55 Variable manufacturing cost per batch for setups, Materials handling, and quality control 2,000 1,800 Cari Pump manufactured 9,000 ECs in 2019 in 30 batches of 300 each. In 2020, Cari Pump anticipates needing 10,500 ECs. The ECs would be produced in 60 batches of 175 each. A supplier, Furry Deals has enquired about supplying ECs to Cari Pump in 2020 at $350 per EC on whatever delivery schedule Cari Pump wants. Required: 1.What is the total expected production cost per unit of ECs in 2020? Assume that if Cari Pump acquires ECs from Furry Deals, the capacity now employed to produce them will become idle. Should Cari Pump produce ECs or buy them from Furry Deals based only on quantitative analysis? 2.Suppose that if Cari Pump purchases ECs from Furry Deals, its best alternative use of the capacity currently used for ECs is to make and sell special electronic components (SECs) to the Spec Company. Cari Pump estimates the following incremental revenues and costs from SECs: Total expected incremental future revenues $2,200,000 Total expected incremental future costs $2,350,000 On the basis of quantitative analysis alone, should Cari Pump make ECs or buy them from Furry Deals?
In today's fast-paced business environment, decision making is a critical task for managers. Making the right decisions is vital to the success of a company, and it requires access to relevant information.
Cari Pump (CP) Company manufactures water pumps. An important part of the pump is its electronic component (EC). Cari Pump collects data with the following cost information about the costs of making ECs in 2019 and the expected costs in 2020:
Current Costs (2019) Expected Costs (2020)
Fixed manufacturing cost
Fixed manufacturing overhead costs that
can be avoided if ECs are not made 360,000 360,000 Fixed manufacturing overhead costs of plant
cannot be avoided even if ECs are not made 850,000 850,000
Variable
Direct material cost per EC $ 200 $ 190
Direct manufacturing labor cost per EC 60 55
Variable manufacturing cost per batch for setups,
Materials handling, and quality control 2,000 1,800
Cari Pump manufactured 9,000 ECs in 2019 in 30 batches of 300 each. In 2020, Cari Pump anticipates needing 10,500 ECs. The ECs would be produced in 60 batches of 175 each.
A supplier, Furry Deals has enquired about supplying ECs to Cari Pump in 2020 at $350 per EC on whatever delivery schedule Cari Pump wants.
Required:
1.What is the total expected production cost per unit of ECs in 2020? Assume that if Cari Pump acquires ECs from Furry Deals, the capacity now employed to produce them will become idle. Should Cari Pump produce ECs or buy them from Furry Deals based only on quantitative analysis?
2.Suppose that if Cari Pump purchases ECs from Furry Deals, its best alternative use of the capacity currently used for ECs is to make and sell special electronic components (SECs) to the Spec Company. Cari Pump estimates the following incremental revenues and costs from SECs:
Total expected incremental future revenues $2,200,000
Total expected incremental future costs $2,350,000
On the basis of quantitative analysis alone, should Cari Pump make ECs or buy them from
Furry Deals?
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