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T.O.T.E.S. CASE STUDY - TETRA OUTSOURCE THE CUTTING DEPARTMENT: MAKE-BUY DECISION Scenario 1: T.O.TE.S. fabric supplier has offered to precut the fabric to TOTES. specifications for 0.60 per tote. The cost per yard of fabric would stay the same. The Standard Cost Card from Exhibit 2-B includes the breakout of direct labor costs. The company recently completed an Activity-Based Costing analysis that showed variable manufacturing overhead for the cutting department is $0.20 per tote. In addition, the cutting machines could be sold for $50,000. Use Exhibit 5-13-1 for your analysis. Hints EXHIBIT 5-B-1: Scenario 1 Make-Buy Analysis T.O.T.E.S. Make-Buy Analysis Scenario 1 Current costs can be found on Exhibit 2-R. Total Costs Cost per unit for 500,000 units Cost to Make Cost to Buy Outsource cutting department Direct Labor - Cutting Variable OH Costs - Cutting Sale of cutting machines Total Costs Total Cost per unit Only need to be concerned with the relevant costs Scenario L Analysis: Based on the above information, should T.O.T.E.S. outsource the cutting department? Why or why not? 33 TOTES. Case Study - TETRA Names Scenarie TOTES outsources the cutting department and sells the cutting machine, they would free up factory space for a new product that Tonia has created. Based on a market analysis, they have determined they could carn a contribution margin of 575,000 with additional fixed costs of 30,000 at they added this product line to the company. Use Exhibit 5-B-2 for your analysis Hints EXHIBIT 5-B-2: Scenario 2 Make-Buy Analysis T.O.T.E.S. Make-Buy Analysis Scenario 2 Total Costs Total Costs from Scenario 1 Additional Contribution Margin Less Additional Fixed Costs Additional Net Oper. Income Remember Additional income is on opportunity cost Net cost Scenario 2 Analisis: Should TOTES. outsource the cutting department if this additional product line is taken into consideration? Why or why not? 34 TOTES. CASE STUDY - TETRA Calculate the standard cost for each tote for the current year's production level using Information frown Exhibit 1-A and 1-B. Round all standard costs to four (4) decimal places. EXHIBIT 2-B: Standard Cost Card T.O.T.E.S. CALCULATING STANDARD COSTS Forecasted Production per year 500,000 totes Total Cost (for 500.000 totes) Standard Cost [cost per tote DIRECT MATERIALS $ Fabric Webbing $600,000 15 1.2 5555,000 Total Direct Materials Cost per Tote (Round to 4 decimal proces s 52.31 SLAM $ .24 5.10 DIRECT LABOR 120.000 Cutting Verovala Sewing $ 89, ove Printing Total Direct Labor Cost per Tote (Round to 4 decimal places) MANUFACTURING OVERHEAD $ . $1573,000 .B.03 15 .44 .43 .6176 398899 $ Estimated MOH Costs hund per tote to 4 decimal places) Total Product Cost per Tote (Round to decimal place) 1898 3.3576 nik Costs for each job are tracked tsing a Job Cost Record (Exhibit 2-C). The Job Cost Record is found after copies of the Materials Requisition form and Labor Time Records for the period. Use the information on these documents to complete the Job Cost Record for Phineas Phil's Specialty Market order of 1,000 red zrocery totes with logos. 11