Pyson company produces air-purifier fan B177 model. This model is the best seller with expected annual sales of 20,000 units. Each B117 fan has a thermostat component which enables the fan to automatically work upon a pre-set temperature. The company has always produced the thermostat component internally, but the general manager is considering purchasing this component from an external supplier. The purchase decision would eliminate all variable costs but some of the fixed costs. Allocated costs will have to be absorbed by other production departments. Variable manufacturing costs to produce each thermostat component were: Direct materials per unit: $6 Direct labour per unit: $4.80 Indirect labour per unit: $0.66 Utilities per unit: $0.60 Fixed manufacturing costs to produce each thermostat component were: Cost item Direct Allocated Depreciation $3,300 $2,700 Property taxes $1,500 $600 Insurance $2,850 $1,350 Pyson currently receives an offer from Flurry Ltd. to purchase a similar thermostat component with the following information: 1. The lowest quotation for 15,000 units of thermostat component is $196,000 2. Freight and inspection costs would be $0.40 per unit and receiving costs of $2,800 per year would be incurred by Pyson. 3. If the thermostat components are purchased on an ongoing basis, one of Pyson’s manufacturing plants would be closed. The facilities would be rented out to produce a net income of $18,000 per year. 4. If the thermostat components are purchased on an ongoing basis, a machine operator from the plant will be transferred to the purchasing department (the employee’s salary is $40,000). Required a) Should Pyson Company continue to make the thermostat or purchase the part from the external supplier? Justify your answer with an appropriate incremental analysis. b) ) What other (non-financial) factors should management consider in making this make-or-buy decision?
Pyson company produces air-purifier fan B177 model. This model is the best seller with expected annual sales of 20,000 units. Each B117 fan has a thermostat component which enables the fan to automatically work upon a pre-set temperature. The company has always produced the thermostat component internally, but the general manager is considering
purchasing this component from an external supplier.
The purchase decision would eliminate all variable costs but some of the fixed costs.
Allocated costs will have to be absorbed by other production departments.
Variable
Direct materials per unit: $6
Direct labour per unit: $4.80
Indirect labour per unit: $0.66
Utilities per unit: $0.60
Fixed manufacturing costs to produce each thermostat component were:
Cost item Direct Allocated
Property taxes $1,500 $600
Insurance $2,850 $1,350
Pyson currently receives an offer from Flurry Ltd. to purchase a similar thermostat component with the following information:
1. The lowest quotation for 15,000 units of thermostat component is $196,000
2. Freight and inspection costs would be $0.40 per unit and receiving costs of $2,800 per
year would be incurred by Pyson.
3. If the thermostat components are purchased on an ongoing basis, one of Pyson’s
manufacturing plants would be closed. The facilities would be rented out to produce a net
income of $18,000 per year.
4. If the thermostat components are purchased on an ongoing basis, a machine operator
from the plant will be transferred to the purchasing department (the employee’s salary is
$40,000).
Required
a) Should Pyson Company continue to make the thermostat or purchase the part from
the external supplier? Justify your answer with an appropriate incremental analysis.
b) ) What other (non-financial) factors should management consider in making this make-or-buy decision?
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