Accounting Problems
Sweetest Honey
b-24.02student.xlsProblem
| Pure Comfort manufactures and sells mattresses with adjustable air chambers. Pure Comfort has been producing and selling approximately 500,000 units per year. Each units sells for $600, and there are no variable selling, general, or administrative costs. The company has been approached by a foreign supplier who wishes to provide the air compressor component for $90 per unit. Total annual manufacturing costs, including air compressors, is as follows: | ||
| Direct materials | $ 50,000,000 | |
| Direct labor | 80,000,000 | |
| Variable factory overhead | 16,000,000 | |
| Fixed factory overhead | 35,000,000 | |
| If Pure Comfort outsources the air compressor, it is expected that direct materials will be reduced by 20%, direct labor by 30%, and variable factory overhead by 25%. There will be no reduction in fixed factory overhead. | ||
| (a) | Should Pure Comfort outsource the air compressor? | |
| (b) | If outsourcing the air compressor will free up capacity, and enable Pure Comfort to increase production and sales to 600,000 units per year, would it make sense to outsource? |
&R&"Myriad Web Pro,Bold"&20B-24.02
B-24.02
Worksheet
| (a) | ||||
| Internal | Outsource | |||
| Direct materials | $ - | $ - | ||
| Direct labor | - | - | ||
| Variable factory overhead | - | - | ||
| Fixed factory overhead | - | - | ||
| Outsourced compressors | - | - | ||
| Total cost of each option | $ - | $ - | ||
| (b) |
&L&"Myriad Web Pro,Bold"&12Name:
Date: Section: &R&"Myriad Web Pro,Bold"&20B-24.02
B-24.02
