Question

Southern Star Cold Storage (SSCS) produces ice machines. Some of the ice machines SSCS makes require a component called a type AF condenser. Accordingly, SSCS produces 20,000 type AF condensers each year.

Halifax Electric has offered to supply SSCS with the condensers for $101 each. The facilities SSCS uses to make the condensers can be rented to another company for $24,000 per year. SSCS’s annual production cost for the type AF condensers is as follows:

Direct material $ 940,000

Direct labor 730,000

Variable manufacturing overhead 302,000

Fixed manufacturing overhead 240,000

Total $2,212,000 In addition, $40,000 in fixed factory overhead will be avoided if the company stops making the condensers.

Required: Should SSCS accept the outside supplier’s offer? Provide calculations to support your recommendation (use relevant costs only). Briefly discuss two qualitative aspects SSCS should consider in this make or buy decision. Your discussion must identify one factor that supports making the condenser order and one factor that supports buying the condenser. (Do not copy directly from text.)

Answer 1

Answer ;

step -1

cost of AF condenser if SSCS accept the outside supplier’s offer

(a)cost of buying AF condenser = $101 *20000 = $ 2020000

step -2

cost of AF condenser if SSSCS making in own factory

statement of relevant cost

Direct material $940000

Direct labour    $730000

Varriable oh    $302000

Avoidable fixed cost    $40000

opportunity cost    $ 24000

Total cost of making (b) $2036000

SSCS should accept the outside supplier’s offer of buying condensers because if company accept the offer company can generate the profit of $ 16000 (2036000-2020000)

Two qualitative aspects SSCS should consider in this make or buy decision

1.if co buying the condenser co should consider quality and reliability of goods to be bought because defective component may damage the reputation and reliability of the firms abilty.

2. If co making the condenser co should consider Possibility of ceasing production in near or medium distance future