Woodchuck Manufacturing produces quality tools for woodworking. Woodchuck has been forced to increase prices by about 40 per cent over the last few years, mostly because of the increased costs of purchased components and other direct materials used in the manufacture of its products. Although Woodchuck will always have a market for its products among craftspeople who appreciate quality, the company is losing much of its business to companies manufacturing lowquality tools. Some of Woodchuck's departments are operating at about half of their usual capacity.

Chuck Woods, the company's founder and CEO, would not allow his name to be associated with poor-quality tools. He feels some price reductions are necessary, however, to keep sales from falling. He is concerned more about providing jobs for his employees than about earning a large profit. If sales fall much further, he will not be able to do either. Not a single employee has been laid off nor has anyone received less than a full pay cheque, even though many skilled machinists have pushed brooms and done odd jobs these last few months.

Recently one of Chuck's foremen suggested that the company attempt to manufacture some of the components currently being purchased. Chuck and the foreman choose to study the possibility of manufacturing a 2-centimetre chuck used on hand drills, drill presses and lathes. Everyone was quite excited when it was decided that the kind of equipment needed to manufacture the chuck was owned by the company and not currently in use. Production would be no problem for the skilled machinists employed by Woodchuck.

It took about a week for Chuck's accountant to find all the information necessary to prepare the report that follows.

Chuck knows you are studying accounting and has asked your opinion.
Required:
Prepare a brief analysis of this situation and write Chuck a letter explaining your recommendation about whether his company should make or buy this component. Consider whether it would also be worthwhile to make rather than buy other components. What other issues should Chuck consider in making his decision?

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15 December Dear Chuck, I'm sorry to report that after careful study of the costs of manufacturing 2-centimetre chucks, I've concluded that we can't afford to make them. We currently use about 1000 chucks of this size per month and are now buying them for $6.50 each. The costs to manufacture 1000 chucks per month would be: $1850 Direct materials Direct labour 1900 Variable overhead 1175 3800 Fixed overhead Total $8725 I'm sorry to bring you this bad news just before the holidays, Chuck. We buy hundreds of other components. Perhaps one of them would be cheaper to make than to buy. I'll be glad to make the cost estimates. Lief Schmidt