Logan Company manufactures several toy products. One is a large plastic truck, which requires a plastic truck body, two metal axles, and four rubber wheels. Logan currently manufactures and assembles all the parts.

Another toy company has offered to sell the parts to Logan at $1.95 per truck if 60,000 or more parts are purchased each year, and at $2.15 per truck if less than 60,000 parts are purchased. Logan is considering this offer. The space used in producing the parts could be used for a new toy, which is scheduled to begin production next year. If Logan continues to produce the parts for the plastic truck, the company will have to lease space from another company in an adjacent building to produce the new toy. The rent would be $16,100 per year.

Other information related to the truck is:

The marketing department has estimated that sales for the plastic truck will be approximately 46,000 units per year for the next three years. The fixed manufacturing overhead is indirect and will still be incurred regardless of which decision is made.
Required:
1. Describe Logan's two alternatives for this decision.
2. What costs are relevant to the decision?
3. Which alternative should Logan select?
4. What would be the better decision had Logan not planned to produce the new toy?
5. Interpretive Question: What are some of the qualitative factors that Logan might consider in making thedecision?

Transcribed Image Text:

Assemble Truck Produce Total Parts Direct materials. Direct labor. Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs $1.50 $1.30 $0.20 0.20 0.30 0.50 0.25 0.40 0.15 0.20 0.40 0.60 $2.05 $0.95 $3.00