DECISION MAKING (MAKE OR OUTSOURCE) The Night's Watch Inc. produces ice machines for a variety of...

  

 

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DECISION MAKING (MAKE OR OUTSOURCE) The Night's Watch Inc. produces ice machines for a variety of different customers. The costs of manufacturing and marketing ice machines at the company's normal volume of 4,000 units per month are shown below. A regular selling price of $740 per unit should be assumed. Costs per unit for ice machines: Variable materials 120 Variable labor 140 Variable overhead 70 Fixed overhead 100 Total manufacturing costs 430 Variable marketing costs 60 Fixed marketing costs 110 Total marketing costs 170 Total unit costs 600 Required: a) A proposal is received from an outside contractor who will make and ship 1,250 ice machines per month directly to The Night's Watch's customers as orders are received from The Night's Watch's sales force. The Night's Watch's fixed marketing costs would be unaffected, but its variable marketing costs would be cut by 20 percent for these 1,250 units produced by the contractor. The Night's Watch's plant would operate at 68.75 percent of its normal level, and total fixed manufacturing costs would be cut by 30 percent. What in-house unit cost should be used to compare with the quotation received from the supplier? Should the proposal be accepted for a price (that is, payment to the contractor) of $450 per unit? b) Assume the same facts as above in requirement (a) except that the idle facilities would be used to produce 600 enhanced ice machines per month. These enhanced ice machines can make ice blocks as big as a person, and could be sold for $1,000 each. Each enhanced ice machine costs an additional $50 in variable materials, an extra $100 in variable labor, and an extra $70 in variable overhead per unit, relative to the cost of a regular ice machine. Furthermore, these enhanced ice machines incurred an extra $90 in marketing costs per unit over the regular ice machines. Fixed marketing and manufacturing costs would be unchanged whether the original 4,000 regular ice machines were manufactured or the mix of 2,750 regular ice machines plus 600 enhanced ice machines were produced. What is the maximum purchase price per unit that The Night's Watch should be willing to pay the outside contractor, assuming it could sell all 600 enhanced ice machines? Should the proposal be accepted for a price of $450 per unit to the contractor? Please note that these additional variable manufacturing costs and variable marketing costs per unit ONLY apply to the enhanced ice machines, and not the regular ice machines. Furthermore, please note that these extra costs should be added to the costs of the regular ice machines to get the cost of the enhanced ice machines. For example, the variable materials per enhanced ice machine is $120 + $50 = $170. DECISION MAKING (MAKE OR OUTSOURCE) The Night's Watch Inc. produces ice machines for a variety of different customers. The costs of manufacturing and marketing ice machines at the company's normal volume of 4,000 units per month are shown below. A regular selling price of $740 per unit should be assumed. Costs per unit for ice machines: Variable materials 120 Variable labor 140 Variable overhead 70 Fixed overhead 100 Total manufacturing costs 430 Variable marketing costs 60 Fixed marketing costs 110 Total marketing costs 170 Total unit costs 600 Required: a) A proposal is received from an outside contractor who will make and ship 1,250 ice machines per month directly to The Night's Watch's customers as orders are received from The Night's Watch's sales force. The Night's Watch's fixed marketing costs would be unaffected, but its variable marketing costs would be cut by 20 percent for these 1,250 units produced by the contractor. The Night's Watch's plant would operate at 68.75 percent of its normal level, and total fixed manufacturing costs would be cut by 30 percent. What in-house unit cost should be used to compare with the quotation received from the supplier? Should the proposal be accepted for a price (that is, payment to the contractor) of $450 per unit? b) Assume the same facts as above in requirement (a) except that the idle facilities would be used to produce 600 enhanced ice machines per month. These enhanced ice machines can make ice blocks as big as a person, and could be sold for $1,000 each. Each enhanced ice machine costs an additional $50 in variable materials, an extra $100 in variable labor, and an extra $70 in variable overhead per unit, relative to the cost of a regular ice machine. Furthermore, these enhanced ice machines incurred an extra $90 in marketing costs per unit over the regular ice machines. Fixed marketing and manufacturing costs would be unchanged whether the original 4,000 regular ice machines were manufactured or the mix of 2,750 regular ice machines plus 600 enhanced ice machines were produced. What is the maximum purchase price per unit that The Night's Watch should be willing to pay the outside contractor, assuming it could sell all 600 enhanced ice machines? Should the proposal be accepted for a price of $450 per unit to the contractor? Please note that these additional variable manufacturing costs and variable marketing costs per unit ONLY apply to the enhanced ice machines, and not the regular ice machines. Furthermore, please note that these extra costs should be added to the costs of the regular ice machines to get the cost of the enhanced ice machines. For example, the variable materials per enhanced ice machine is $120 + $50 = $170.