70.2K

Verified Solution

Link Copied!

Make or Buy Howard Grills makes high-end barbecues. The company has recently been approached by a supplier who has offered to provide the company igniters (the barbecue part that provides a spark to start the flame). The company has offered a price of $5.00 per igniter. Howards internal costs of producing the igniter follow: Per 30,000 igniters Igniter per year

Direct materials $1.2 $37,500

Direct labour 0.25 7,500

Variable manufacturing overhead 0.50 15,000

Fixed manufacturing overhead traceable* 3.00 90,000

Fixed manufacturing overhead allocated 45,000

Total $195,000

*2/3 relate to equipment maintenance and 1/3 relate to depreciation of specialized equipment (no resale value).

Gloria Howard, the owner and CEO of Howard Grills notes: To make 30,000 igniters costs us $195,000, their starters are just as good and buying from them will only cost us $150,000, Im no accountant, but it seems obvious we should take this deal. Required

a.) Assuming there is no other use for the space used to make the starters, what is the net dollar advantage or disadvantage of accepting the suppliers offer?

b.) If the offer is accepted, the company could use the space to develop a new product line that would generate estimated margins of $25,000. Should the company accept the suppliers offer?

Answer & Explanation Solved by verified expert

See Answer