Ocean Products, Inc., currently manufactures its own surfboards for customers. Management is interested in outsourcing production...

  

Transcribed Image Text:

Ocean Products, Inc., currently manufactures its own surfboards for customers. Management is interested in outsourcing production of these surfboards to a reputable manufacturing company that can supply the surfboards for $80 per unit. Ocean Products, Inc., incurs the following annual production costs to produce 10,000 surfboards internally. Variable production costs Direct materials Direct labor Manufacturing overhead Fixed production costs Factory building and equipment lease Factory insurance Production supervisor's salary Total production costs Per Unit $20 10 30 Total Annual Cost at 10,000 Units $200,000 100,000 300,000 70,000 50,000 100,000 $820,000 If production is outsourced, all variable production costs, factory building and equipment lease costs, and factory insurance costs will be eliminated. The production supervisor's salary cost will remain regardless of the decision to outsource or to produce internally because the supervisor recently signed a long-term contract with Ocean Products, Inc. Required: a. Perform differential analysis using the format presented in Figure 7.2 " Make-or-Buy Differential Analysis for Best Boards, Inc.". Assume making the surfboards internally is Alternative 1, and buying the surfboards from an outside manufacturer is Alternative 2. b. Which alternative is best? Explain. c. Summarize the result of outsourcing production using the format presented in Figure 7.3 "Summary of Differential Analysis for Best Boards, Inc.". d. Compare the format used in requirement a with that of requirement c. a. C. Variable production costs: Cost to buy from outside d. Fixed production costs: * $800,000 $80 per unit × 10,000 units b. Total production costs (Make internally) Alternative 1 Result of Outsourcing Production $ 0 (Buy from outside) Alternative 2 E $800,000 = Differential Amount ($800,000) Alternative 1 is: Lower Ocean Products, Inc., currently manufactures its own surfboards for customers. Management is interested in outsourcing production of these surfboards to a reputable manufacturing company that can supply the surfboards for $80 per unit. Ocean Products, Inc., incurs the following annual production costs to produce 10,000 surfboards internally. Variable production costs Direct materials Direct labor Manufacturing overhead Fixed production costs Factory building and equipment lease Factory insurance Production supervisor's salary Total production costs Per Unit $20 10 30 Total Annual Cost at 10,000 Units $200,000 100,000 300,000 70,000 50,000 100,000 $820,000 If production is outsourced, all variable production costs, factory building and equipment lease costs, and factory insurance costs will be eliminated. The production supervisor's salary cost will remain regardless of the decision to outsource or to produce internally because the supervisor recently signed a long-term contract with Ocean Products, Inc. Required: a. Perform differential analysis using the format presented in Figure 7.2 " Make-or-Buy Differential Analysis for Best Boards, Inc.". Assume making the surfboards internally is Alternative 1, and buying the surfboards from an outside manufacturer is Alternative 2. b. Which alternative is best? Explain. c. Summarize the result of outsourcing production using the format presented in Figure 7.3 "Summary of Differential Analysis for Best Boards, Inc.". d. Compare the format used in requirement a with that of requirement c. a. C. Variable production costs: Cost to buy from outside d. Fixed production costs: * $800,000 $80 per unit × 10,000 units b. Total production costs (Make internally) Alternative 1 Result of Outsourcing Production $ 0 (Buy from outside) Alternative 2 E $800,000 = Differential Amount ($800,000) Alternative 1 is: Lower

Answer rating: 100% (QA)

Answer a Variable Production Costs Cost to buy from outside Direct Material Direct Labor MOH Fixed P... View the full answer