Golf-2-Go, Inc., a manufacturer of motorized carts for golfers, has just received an offer from a supplier to provide 2,000 units of a component used in its main product. The component is a wheel assembly that Golf-2-Go currently produces internally. The supplier has offered to sell the wheel assembly for $115 per unit. Golf-2-Go is currently using a functional, unit-based costing system that assigns overhead to jobs on the basis of direct labor hours. The estimated functional-based full cost of producing the wheel assembly is as follows:
Direct materials ....$70
Direct labor ......30
Variable overhead ....10
Fixed overhead .....50
Prior to making a decision, the company’s CEO commissioned a special study to see whether there would be any decrease in fixed overhead costs if the component was purchased instead of made in-house. The results of the study revealed the following:
a. Two fewer setups would be needed, saving $1,800 each. (The setups would be avoided, and total spending could be reduced by $1,800 per setup.)
b. One half-time inspector would be needed. The company already uses part-time inspectors hired through a temporary employment agency. The yearly cost of the part-time inspectors for the wheel assembly operation is $12,300 and could be totally avoided if the part were purchased.
c. Engineering work would decrease by 615 hours at $20/hr. (Although the work decreases by 615 hours, the engineer assigned to the wheel assembly line also spends time on other products, and there would be no reduction in his salary.)
d. There would be 200 fewer material moves, at $40 per move.
Required:
1. Ignore the special study, and determine whether the wheel assembly should be produced internally or purchased from the supplier.
2. Now, using the special study data, repeat the analysis.
3. Discuss the qualitative factors that would affect the decision, including strategic implications.
4. After reviewing the special study, the controller made the following remark: “This study ignores the additional activity demands that purchasing would cause. For example, although the demand for inspecting the part on the production floor decreases, will we not have a need to inspect the incoming parts in the receiving area? Will we actually save any inspection costs?” Is the controller right? Would this problem be avoided if Golf-2-Go had an activity-based costing system in place?