stainless refrigerator company purchases ice makers and installs them in its product 544828

Outsourcing Decision

P 1. Stainless Refrigerator Company purchases ice makers and installs them in its products. The ice makers cost $138 per case, and each case contains 12 ice makers. The supplier recently gave advance notice that the price will rise by 50 percent immediately. Stainless Refrigerator Company has idle equipment that with only a few minor changes could be used to produce similar ice makers.

Cost estimates have been prepared under the assumption that the company could make the product itself. Direct materials would cost $100.80 per 12 ice makers. Direct labor required would be 10 minutes per ice maker at a labor rate of $18.00 per hour. Variable overhead would be $4.60 per ice maker. Fixed overhead, which would be incurred under either decision alternative, would be $32,420 a year for depreciation and $234,000 a year for other costs. Production and usage are estimated at 75,000 ice makers a year. (Assume that any idle equipment cannot be used for any other purpose.)

Required

1. Prepare an incremental analysis to determine whether the ice makers should be made within the company or purchased from the outside supplier at the higher price.

2. Compute the variable unit cost to (a) make one ice maker and (b) buy one ice maker.