RE Detailing Ltd produces executive motor coaches and currently manufactures the 'Tent awnings' that accompany them at the following costs: Cost per unit ($) Variable Costs: Direct Material 1250 Direct Labour 750 Variable Overhead 500 Total variable overhead 2500 Fixed Costs: Depreciation (equipment) 500 Depreciation (building) 400 Supervisor salary 300 Total fixed cost 1200 Total cost 3700 The company received an offer from Hyderabad Tents to produce the awnings for $ 3,200 per unit and supply 1,000 awnings for the coming year’s estimated production. If the company accepts this offer and shuts down production of this part of the business, production workers and supervisors will be reassigned to other areas. Assume that for the short-term decision-making process, the company’s total labor costs (direct labor and supervisor salaries) will remain the same if the bar inserts are purchased. The specialized equipment cannot be used and has no market value. However, the space occupied by the awning production can be used by a different production group that will lease it for $ 60,000 per year. Should the company make or buy the awnings? 2. What qualitative factors may also be involved in the decision-making process of the management?
- RE Detailing Ltd produces executive motor coaches and currently manufactures the 'Tent awnings' that accompany them at the following costs:
|
|
Cost per unit ($) |
|
Variable Costs: |
|
|
Direct Material |
1250 |
|
Direct Labour |
750 |
|
Variable Overhead |
500 |
|
Total variable overhead |
2500 |
|
Fixed Costs: |
|
|
|
500 |
|
Depreciation (building) |
400 |
|
Supervisor salary |
300 |
|
Total fixed cost |
1200 |
|
Total cost |
3700 |
The company received an offer from Hyderabad Tents to produce the awnings for $ 3,200 per unit and supply 1,000 awnings for the coming year’s estimated production.
If the company accepts this offer and shuts down production of this part of the business, production workers and supervisors will be reassigned to other areas.
Assume that for the short-term decision-making process, the company’s total labor costs (direct labor and supervisor salaries) will remain the same if the bar inserts are purchased. The specialized equipment cannot be used and has no market value. However, the space occupied by the awning production can be used by a different production group that will lease it for $ 60,000 per year.
- Should the company make or buy the awnings?
2. What qualitative factors may also be involved in the decision-making process of the management?
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