Question

Tubs of Fun produces outdoor hot tubs. They currently manufacture the pumps for the tubs in house. They have discovered that 40% of the pumps fail within their 12 month warranty period, resulting in large warranty costs. Because of this they are looking at buying the pumps from a manufacturer that will also be responsible for any warranty costs on the pumps. Tubs of Fun's cost to manufacture is $80 per unit, including $18 of allocated fixed overhead (primarily depreciation of plant and equipment). The company has spent an average of $20 (labor and parts) repairing each pump returned. Tubs of Fun can purchase the pumps from a reputable manufacturer for $85 per pump.
Tubs of Fun plans to sell 15,000 hot tubs in 2018 (each hot tub contains one pump). Should the company make or buy the pumps. What is the cost savings related to your decision? What qualitative factors should be considered?

Answer 1

Particulars	Per Unit Cost In $	Total Cost for 15,000 units In $
manufacturing Cost	62 (Note 1)	930,000
Repairing cost	(Note 2)	120,000
Total Cost To Manufacture in house		1,050,000
Total Cost In Purchasing	85 (Given)	1,275,000
Total Benefits From Manufacturing in house		225,000

Notes :

1. The fixed cost is not considered in the above table since the cost is unavoidable. i.e.this cost will be continue to incurr even if no product is manufactured in house.

2. Repairing cost for 15,000 unit = (15,000 units *40 %)*$20

                                               = $120,000

As shown by the above table the company shoud make the product in house as the total cost saving in that case would be 225,000.

Qualitative Factors should be considered is given as follows :

1. The company should try to reduce its repair cost by installing new machines or getting repair the existing cost so that the company has to bear less warranty cost.

2. The company should inspect the Final product before giving it to its final customer.