Question

You are a financial manager for Zoom Corp., which manufactures bicycles. In the most recent fiscal year, Zoom manufactured and sold 20,000 bicycles. Wheels, seats, and brake calipers are three components of the bicycles currently manufactured by Zoom. Three different vendors have proposed to provide those components to Zoom, and quoted prices (including shipping) for their delivery. Your task is to determine which, if any, of these proposals should be accepted. Prepare a make vs. buy incremental analysis for each possible course of action in an Excel worksheet. Your grade will be based on the correctness of your answers, as well as the use of Excel. That is, where possible, you should use formulas to get your answers, rather than keyed-in values. See your instructor for help with Excel basics if you need it. In a Word document, prepare a memo stating which of the proposals you suggest accepting, as well as the basis for your conclusions. Also identify any nonfinancial factors you should consider before accepting any of the outsourcing proposals. Attach both files to the Canvas assignment space by the due date of November 6th Below is cost data for Zoom's production of wheels, seats, and calipers. Outside suppliers have offered to provide wheels for $7.27, seats for $7.77, and calipers for $2.53 per piece. Both wheels and seats are branded with the Zoom logo, and that logo will need to be added at the Zoom factory at a cost of $0.50 each for any of these components that are outsourced. For all three components, 75% of the fixed costs are avoidable, and will be eliminated if the component's production is outsourced. In addition, seats and calipers are both produced out of the same small factory space. If both seats and calipers were outsourced, Zoom could lease the space out and increase net income by $6,000 per year, while eliminating all fixed costs for the two components. Wheels eers Seats Calipers Cost category Direct materials Direct labor Variable overhead Fixed overhead Total cost $138,500 96,500 21,000 58,600 $314,600 $55,000 71,000 14,000 37,200 $177,200 $89,000 43,000 16,000 32,000 $180,000 Units produced Cost per unit 40,000 $7.87 20,000 $8.86 80,000 $2.25

Answer 1

Answer:

STATEMENT OF INCREMENTAL ANALYSIS FOR WHEEL Net income Make Buy increase/ Wheel Wheel (decrease) Outsourcing buy cost (40,000 $7.27) 290,800 $ (290,800) Logo cost (40,000 $0.50) 20,000 $ (20,000) Direct materials 138,500 138,500 Direct labour 96,500 96,500 Variable overhead 21,000 21,000 Fixed overhead 58,600 $ 14,650 $ 43,950 Total cost 314,600 $ 325,450 $ (10,850)

Comment: As there is reduction of $10,850 in net income, it is not advisable to buy the wheel component from outside.

STATEMENT OF INCREMENTAL ANALYSIS FOR SEATS Net income Make Buy increase/ Wheel Wheel (decrease) Outsourcing buy cost (20,000 $7.77) 155,400 $ (155,400) Logo cost (20,000 < $0.50) 10,000 $ (10,000) Direct materials 55000 55,000 Direct labour 71000 71,000 Variable overhead 14000 14,000 Fixed overhead 37200 $ 9,300 $ 27,900 Total cost $ 177,200 $ 174,700 $ 2,500

Comment: Seat component may be bought from outside as there is incremental revenue of $2,500.

S STATEMENT OF INCREMENTAL ANALYSIS FOR CALIPERS Net income Make Buy increase/ Wheel Wheel (decrease) Outsourcing buy cost (80,000 < $2.53) 202,400 $ (202,400)| Direct materials 89000 89,000 Direct labour 43000 43,000 Variable overhead 16000 16,000 Fixed overhead 32000 $ 8,000 $ 24,000 Total cost $ 180,000 $ 210,400 $ (30,400)

Comment: It is not advisable at all to buy clipers component from outside as there is huge loss of revenue.

STATEMENT OF INCREMENTAL ANALYSIS FOR BOTH SEATS & CALIPERS Net income Make seats Buy seats increase/ & calipers & calipers (decrease) Outsourcing buy cost $ 357,800 $ (357,800) Logo cost $ 10,000 $ (10,000) Direct materials $ 144,000 $ 144,000 Direct labour $ 114,000 114,000 Variable overhead $ 30,000 30,000 Fixed overhead 69,200 69,200 Lease revenue 6,000 Total cost $ 357,200 $ 367,800 $ (4,600)

Comment: As there is reduction of $4,600 in net income, it is not advisable to buy both the seats and clipers component from outside.