Analyzing a Make-or-Buy Decision
Woodchuck Corp. (see PB7-1) is considering the possibility of outsourcing the production of upholstered chair pads included with some of its wooden chairs. The company has received a bid from Padalong Co. to produce 1,000 units per year for $9 each. Woodchuck has the following information about its own production of the chair pads:
Direct materials | $ 4 |
Direct labor | 2 |
Variable manufacturing overhead | 2 |
Fixed manufacturing overhead | 3 |
Total cost per unit | $11 |
Woodchuck has determined that all variable costs could be eliminated by dropping production of the chair pads, but none of the fixed overhead is avoidable. At this time, Woodchuck has no specific use in mind for the space currently dedicated to producing the chair pads.
Required:
1.Determine the impact this decision would have on Woodchuck’s annual income.
2.Should Woodchuck buy the chair pads from Padalong or continue to make them?
3. Suppose that a new product line that Woodchuck wants to develop could utilize the space currently used for the chair pads. What amount of income must the new product line generate for Woodchuck to outsource the chair pads?
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