Question

The Silva Refrigeration Co. purchases and installs defrost clocks in its products. The clocks cost $180 per case, and each case contains 12 clocks. The supplier recently gave advance notice that, effective in 60 days; the price will rise by 50 percent. The company has idle equipment that, with only a few minor changes could be used to produce similar defrost clocks.

Cost estimates have been prepared under the assumption that the company could make the product itself. Direct materials would cost $120 per 12 clocks. Direct labor required would be 15 minutes per clock at a labor rate of $20.00 per hour. Variable manufacturing overhead would be $6.00 per clock. Fixed manufacturing overhead, which would be incurred under either decision alternative, would be $60,000 a year for depreciation and $300,000 a year for other costs. Production and usage are estimated at 120,000 clocks a year. (Assume that any idle equipment cannot be used for any other purpose.)

Prepare an analysis that indicates whether the defrost clocks should be made within the company or purchased from the outside supplier. Are there any qualitative factors?

-include the unit cost to make one clock

-include unit cost to buy one clock

Answer 1

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