Question

Horan Hockey Ltd Manufactures a variety of hockey skates

Horan Hockey Ltd. manufactures a variety of hockey skates. The company has just received an offer from an outside supplier to provide premium quality skate blades at a price of $138 per pair. These blades would be a major component in the company's best line of skates - the XJ60's. The company is interested in this offer because their own production of these particular skate blades is already at the plant's capacity of 10,000 pairs of blades per year. The present cost (based on the manufacture of 10,000 pairs per year) of producing one pair of XJ60 hockey skates is as follows: DIRECT MATERIALS $250.00 DIRECT LABOUR $175.00 MANUFACTURING OVERHEAD $125.00 The XJ60 skate sells for $750 per pair. The same equipment and facilities are used to produce all of the company's skates. Fixed manufacturing overhead costs associated with the XJ60 skate total $750,000 per year. If the outside supplier's offer to supply skate blades is accepted, the direct material cost would be reduced by 30%, direct labour cost would be reduced by 20%, and the variable manufacturing overhead cost would be reduced by 10%. PART 2 - REQUIRED: a) Should Horan Hockey Ltd. accept the outside supplier's offer? Show all calculations. b) By how much would annual profits increase or decrease if the outside supplier's offer is accepted? c) Briefly describe two other issues that might influence Horan Hockey Ltd. in making this decision.