Analyzing Make-or-Buy Decision
Sunblocker Corp. (see PA7-1) is considering outsourcing production of the umbrella tote bag included with some of its products. The company has received a bid from CarryAll Co. to produce 8,000 units per year for $6 each. Sunblocker has the following information about its own production of the tote bags:
Direct materials | $3 |
Direct labor | 1 |
Variable manufacturing overhead | 1 |
Fixed manufacturing overhead | 2 |
Total cost per unit | $7 |
Sunblocker has determined that all variable costs could be eliminated by dropping production of the tote bags, but none of the fixed overhead is avoidable. At this time, Sunblocker has no specific use in mind for the space currently dedicated to producing the tote bags.
Required:
1.Determine the impact this decision would have on Sunblocker’s annual income.
2.Should Sunblocker buy the tote bags from CarryAll or continue to make them?
3.Suppose that the space Sunblocker currently uses to make the bags could be utilized by a new product line that would generate $10,000 in annual profits. Does this change your recommendation to Sunblocker? If so, how?
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