Deers is a manufacturer of wedding rings, operates in a large metropolitan area. Currently, Deers hasits...

 

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Deers is a manufacturer of wedding rings, operates in a large metropolitan area. Currently, Deers hasits own workshop to prodype rings for couples in their special design. The unit costs to produce the rings are as follows: Silver Gold Direct Materials $90 $160 Direct Labor 30 30 Variable Overhead 8 8 Fixed Overhead 22 22 Total $150 5220 Fixed overhead is detailed as follows: Salary (supervisor) $ 28,000 Depreciation $ 5,000 Rent (workshop area) S 32,000 Overhead is applied on the basis of direct labor hours. These rates were computedusing 5,500 direct labor hours A local workshop has offered to supply Deers all the rings it needs. Its price is $150 for silver and $200 for gold, however, the offerisconditional on supplying both types ofrings-it will not supply just one type forthe price indicated. If the offer is accepted, the equipment used by Deers' workshop would be scrapped (it is old and has no market value), and the workshop would be closed. Deers uses 3,000 silver and 800 gold per year. Required: a Should Deers continue to make its own rings, or should they be purchased from the external supplier? What is the dollar effect of purchasing? b Suppose that the workshop is owned rather than rented and that the $50,000 is depreciation rather than rent. What effect does this have on the analysis in Requirement 1? Deers is a manufacturer of wedding rings, operates in a large metropolitan area. Currently, Deers hasits own workshop to prodype rings for couples in their special design. The unit costs to produce the rings are as follows: Silver Gold Direct Materials $90 $160 Direct Labor 30 30 Variable Overhead 8 8 Fixed Overhead 22 22 Total $150 5220 Fixed overhead is detailed as follows: Salary (supervisor) $ 28,000 Depreciation $ 5,000 Rent (workshop area) S 32,000 Overhead is applied on the basis of direct labor hours. These rates were computedusing 5,500 direct labor hours A local workshop has offered to supply Deers all the rings it needs. Its price is $150 for silver and $200 for gold, however, the offerisconditional on supplying both types ofrings-it will not supply just one type forthe price indicated. If the offer is accepted, the equipment used by Deers' workshop would be scrapped (it is old and has no market value), and the workshop would be closed. Deers uses 3,000 silver and 800 gold per year. Required: a Should Deers continue to make its own rings, or should they be purchased from the external supplier? What is the dollar effect of purchasing? b Suppose that the workshop is owned rather than rented and that the $50,000 is depreciation rather than rent. What effect does this have on the analysis in Requirement 1?

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In the given case we have to compare the Manufacturing cost with the Purchasing cost Step 1 Cost of ... View the full answer