Question

Northern Manufacturing wants to outsource its leather processing function for the month of November so it can renovate its buildings. Dakota Manufacturing has offered to supply Northern Manufacturing with 1,500 ft2 of processed leather for $9.50 per square feet in November so that Northern Manufacturing can continue to fulfill its regular orders. This will allow Northern Manufacturing to pause its facility and not incur any manufacturing costs for the month of November.

Upon review of November’s production data of Northern Manufacturing, you have compiled the following information (excluding special order):

• Direct materials cost per unit = $1.36

• Labor cost per unit = $2.36

• Variable manufacturing overheads per unit = $3.00

• Variable selling overheads per unit = $2.31

• Fixed manufacturing overheads = $ 4,000

• Fixed selling overheads = $ 2,750

• Units produced and sold = 1,500 ft2

PART C (20 points): The building renovations are not urgent but Northern Manufacturing would like to see if the offer from Dakota Manufacturing is favorable. Use the information provided above to conduct a Make-Buy analysis for November and decide whether Northern Manufacturing should accept the offer from Dakota Manufacturing or not.

		Process in-house	Outsource processing
Direct materials cost per unit		$1.36
Labor cost per unit		$2.36
Variable manufacturing overheads per unit		$3.00
Variable selling overheads per unit		$2.31
Fixed manufacturing overheads		$            4,000
Fixed selling overheads		$            2,750
Units		1,500 ft^2
Northern Manufacturing
Make-Buy Analysis
October 31, 20X1
		Status Quo:	Alternative:
		Process in-house	Outsource processing	Difference
Direct materials costs				$                 -	-
Labor costs				$                 -	-
Variable manufacturing overheads				$                 -	-
Variable selling overheads				$                 -	-
Fixed manufacturing overheads				$                 -	-
Fixed selling overheads				$                 -	-
Total Costs				$                 -	-

Answer 1

	Cost for Process in-house		Outsource Processing		Difference
	Per Unit	1500 ft2	Per Unit	1500 ft2
Purchase cost			$          9.50	$     14,250.00	$ -14,250.00
Direct Material Cost	$            1.36	$    2,040.00			$      2,040.00
Labor cost per unit	$            2.36	$    3,540.00			$      3,540.00
Variable Manufacturing Overheads	$            3.00	$    4,500.00			$      4,500.00
Fixed Manufacturing Overheads		$    4,000.00			$      4,000.00
		$ 14,080.00		$     14,250.00	$        -170.00

Selling overheads will not be considered since it will remain same for both.
Since Outsource processing cost is higher than in house cost, offer should not be accepted