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 $7.32, seats for $9.38, and calipers for $2.12 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 Seats Calipers Cost category Direct materials Direct labor Variable overhead Fixed overhead Total cost $140,500 94,500 21,000 59,200 $315,200 $54,000 72,000 14,000 39,600 $179,600 $90,000 42,000 16,000 30,800 $178,800 Units produced Cost per unit 40,000 $7.88 20,000 $8.98 80,000 $2.24 Hints: Prepare incremental analyses for each component separately. Make wheels vs. buy wheels, etc. Since there are additional implications to outsourcing both seats and calipers, do a make vs. buy analysis assuming both are outsourced. A correct solution, then, will likely have at least four incremental analyses. You may use the second tab of this workbook to prepare your solutions, or create a new file. Since you will be attaching this file to the Canvas assignment page, there are no file naming conventions you need to observe.

Answer 1

Answer is given below with working

1. Buy Make Vs Buy - Wheels Cost of In-house Direct Materials $140,500 Direct Labor $94,500 Variable Overhead $21,000 Fixed Overhead $59,200 Buying Cost Logo Cost Total Cost $315,200 Total Units 40,000 Cost per Component $7.88 $14,800 $292,800 $20,000 $327,600 40,000 $8.19 Conclusion Since cost of in-house is cheaper component should be made in-house 2. Make Vs Buy - Seats Buy Cost of In-house $54,000 $72,000 $14,000 $39,600 Direct Materials Direct Labor Variable Overhead Fixed Overhead Buying Cost Logo Cost Total Cost Total Units Cost per Component $9,900 $187,600 $10,000 $207,500 20,000 $10.38 $179,600 20,000 $8.98 Conclusion Since cost of in-house is cheaper component should be made in-house 3. Buy Make Vs Buy - Calipers Cost of In-house Direct Materials $90,000 Direct Labor $42,000 Variable Overhead $16,000 Fixed Overhead $30,800 Buying Cost Total Cost $178,800 Total Units 80,000 Cost per Component $2.24 $7,700 $169,600 $177,300 80,000 $2.22 Conclusion Since Buying Cost is cheaper the item should be purchased externally 4. Buy Make Vs Buy - Seat and Calipers Cost of In-house Direct Materials $144,000 Direct Labor $114,000 Variable Overhead $30,000 Fixed Overhead $70,400 Buying Cost-Seat Buying Cost- Calipers Logo Cost - Seat Total Cost $358,400 Less Rental Income Net Cost $358,400 $187,600 $169,600 $10,000 $367,200 $6,000 $361,200 Conclusion Since cost of in-house is cheaper Only Calipers should be purchased externally 5. Non-financial factors to consider in Make Vs Buy decision - Supplier reliability - Quality factors - Labor issues - Demand And Supply management