Question: Greenview Corp is considering the possibility of outsourcing the production

Greenview Corp. is considering the possibility of outsourcing the production of the upholstered chair pads included with some of its wooden chairs. The company has received a bid from Night Hawk Co. to produce 1,000 units per year for $9 each. Greenview has the following information about its own production of the chair pads:
Direct materials ........... $ 4
Direct labor .............. 1
Variable manufacturing overhead ...... 2
Fixed manufacturing overhead ....... 3
Total cost per unit ........... $10

Greenview has determined that all variable costs could be eliminated by dropping production of the chair pads, and that 30 percent of the fixed manufacturing overhead is avoidable. At this time, Greenview has no specific use in mind for the space currently dedicated to producing the chair pads.

1. Compute the difference in cost between making and buying the chair pads.
2. Should Greenview buy the chair pads from Night Hawk or continue to make them?
3. Suppose that a new product line that Greenview wants to develop could utilize the space currently used for the chair pads. How much profit must the new product line generate for Greenview to be indifferent between making or buying the chair pads?

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  • CreatedFebruary 27, 2015
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