The management of Rainfree Limited must decide whether to continue manufacturing a part or to buy it from an outside supplier. The part is the mechanized arm of an umbrella the company manufactures. An analysis of the accounting records and production data revealed the following for the past year: 1. The company produced 35,000 mechanical arms. 2. Each mechanical arm requires 10 minutes to produce. Three people in the Machining Department work full time producing the mechanical arms. Each person is paid $12.00 per hour. 3. The cost of materials used in each mechanical arm is $2.00. 4. Manufacturing costs directly related to the production of the mechanical arm are: supervision wages, $7,500; quality control, $1,500; amortization, $1,800; property taxes and insurance, $1,000 (allocated on the basis of factory space). 5. An outside firm is offering to sell the mechanical arm to Rainfree for $4 per unit. Freight charges will be $0.40 per unit, and a part-time receiving clerk at $8,500 per year will be required. 6. If the mechanical arm is purchased, the excess space will be used to store Rainfree's finished products. Currently, Rainfree rents storage space at approximately $0.80 per unit per year. Approximately 4,500 units per year are stored in the rented space. Required: Should Rainfree make or buy the mechanical arm? Support your answer with calculations.
The management of Rainfree Limited must decide whether to continue manufacturing a part or to buy it from an outside supplier. The part is the mechanized arm of an umbrella the company manufactures. An analysis of the accounting records and production data revealed the following for the past year: 1. The company produced 35,000 mechanical arms. 2. Each mechanical arm requires 10 minutes to produce. Three people in the Machining Department work full time producing the mechanical arms. Each person is paid $12.00 per hour. 3. The cost of materials used in each mechanical arm is $2.00. 4. Manufacturing costs directly related to the production of the mechanical arm are: supervision wages, $7,500; quality control, $1,500; amortization, $1,800; property taxes and insurance, $1,000 (allocated on the basis of factory space). 5. An outside firm is offering to sell the mechanical arm to Rainfree for $4 per unit. Freight charges will be $0.40 per unit, and a part-time receiving clerk at $8,500 per year will be required. 6. If the mechanical arm is purchased, the excess space will be used to store Rainfree's finished products. Currently, Rainfree rents storage space at approximately $0.80 per unit per year. Approximately 4,500 units per year are stored in the rented space. Required: Should Rainfree make or buy the mechanical arm? Support your answer with calculations.
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter17: Activity Resource Usage Model And Tactical Decision Making
Section: Chapter Questions
Problem 6E: Elliott, Inc., has four salaried clerks to process purchase orders. Each clerk is paid a salary of...
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Transcribed Image Text:The management of Rainfree Limited must decide whether to continue manufacturing a part or to buy
it from an outside supplier. The part is the mechanized arm of an umbrella the company manufactures.
An analysis of the accounting records and production data revealed the following for the past year:
1. The company produced 35,000 mechanical arms.
2. Each mechanical arm requires 10 minutes to produce. Three people in the Machining
Department work full time producing the mechanical arms. Each person is paid $12.00
per hour.
3. The cost of materials used in each mechanical arm is $2.00.
4. Manufacturing costs directly related to the production of the mechanical arm are: supervision
wages, $7,500; quality control, $1,500; amortization, $1,800; property taxes and insurance,
$1,000 (allocated on the basis of factory space).
5. An outside firm is offering to sell the mechanical arm to Rainfree for $4 per unit. Freight
charges will be $0.40 per unit, and a part-time receiving clerk at $8,500 per year will be
required.
6. If the mechanical arm is purchased, the excess space will be used to store Rainfree's
finished products. Currently, Rainfree rents storage space at approximately $0.80 per unit
per year. Approximately 4,500 units per year are stored in the rented space.
Required:
Should Rainfree make or buy the mechanical arm? Support your answer with calculations.
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