J Plumber (Pty) Ltd has purchased 50 000 pumps annually from Koop Ltd. The price has increased each year and reached R70.00 per unit last year. Because the purchase price has increased significantly, J Plumber (Pty) Ltd management has asked that an estimate be made of the cost to manufacture the pump in J Plumber (Pty) Ltd facilities. J Plumber (Pty) Ltd products consist of stamping and castings. The company has little experience with products requiring assembly.

The engineering, manufacturing and accounting departments have prepared a report for management, which included the estimate shown below for an assembly run of 5 000 pumps.

Additional production employees would be hired to manufacture the subassembly. No additional equipment, space, supervision or administrative staff would be needed.

The report states that total costs for 5 000 units are estimates at R560 000 or R112 a unit. The current purchase price is R75.00 a unit, so the report recommends a continued purchase of the product.

Components (outside purchases) Assembly labour*

Factory overhead**

General and administrative overhead*** Total Costs

R120 000 R150 000 R225 000

R65 000 R560 000

*Assembly labour consists of hourly production workers.

**Manufacturing overhead is applied to products on a direct labour basis. Variable overhead costs vary closely with direct labour cost.

Fixed Overhead

Variable Overhead Manufacturing overhead rate

50% of direct labour cost 100% of direct labour cost

150% of direct labour cost

***General and administrative overhead is applied at 13.13% of the total cost of material (or components), assembly labour and manufacturing overhead.

Required:

1. Was the analysis prepared by J Plumber (Pty) Ltd and their departments, and their recommendation to continue purchasing the pumps correct?

Explain your answer and include any supporting calculations you consider necessary. (9)

2. Discuss three qualitative factors related to this make or buy decision. (6)

Answer rating: 100% (QA)

What are Quantitative Factors Quantitative factors are numerical outcomes from a decision that can b... View the full answer