Cooper Manufacturing produces high-quality cabinets. Cooper has been forced to increase prices by about 40 per cent over the last few years, mostly because of the increased costs of purchasing quality wood and other direct materials used in the manufacture of its cabinets. Although Cooper will always have a market for its products among builders of excellence who appreciate quality, the company is losing much of its business to companies manufacturing lower-quality cabinets. Some of Cooper’s departments are operating at about half of their usual capacity.
Greg Cooper, the company’s founder and CEO, does not want his name to be associated with poor-quality cabinets.
However, he feels that some price reductions are necessary to keep sales from falling. He is more concerned about providing jobs for his employees than with 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, and nor has anyone received less than a full pay cheque, even though many skilled craftspeople have ’pushed brooms’ and done odd jobs these last few months.
Recently, one of Greg’s foremen suggested that the company attempt to manufacture some of the components currently being purchased. Greg and the foreman choose to study the possibility of manufacturing a two-way hinge to be used on the doors. The staff was quite excited when it was decided that the kind of equipment needed to manufacture the hinge was owned by the company already and not currently in use. Production would be no problem for the skilled craftspeople employed by Cooper.
It took about a week for Greg’s accountant to find all the information necessary to prepare the report that follows.
Greg knows you are studying Accounting, and has asked your opinion.

Required:
Prepare a brief analysis of this situation, and write Greg 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 Greg consider in making his decision?

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22 December Dear Greg, I'm sorry to report that, after careful study of the costs of manufacturing two-way hinges, I've concluded that we can't afford to make them. We currently use about 5000 hinges of this type per month and are now buying them for $2.50 each. The costs to manufacture 5000 hinges per month would be: Direct materials $4 850 Direct labour 3 700 Variable overhead 2 175 Fixed overhead 4 000 Total $14 725 I'm sorry to bring you this bad news just before the holidays, Greg. 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. Fred West