Your procurement manager recently announced that a new vendor made an offer to provide soldering- only operations that meet all of the new no-lead environmental standards for the industry. You are interested because soldering is only one of the operations needed to produce the product, and you are expecting a new order which may exceed your own in-house soldering capacity. The new order would require that you meet the no-lead standards. If you do not use the outside company, you may have to add some capacity to meet the new order requirements. The outside firm quoted a delivered price of $4.50 per unit. Below are the options: Buy from new vendor or continue to do the job in-house: The direct labor and variable overhead cost for your auto product will be reduced by 15%. They also predict that your material cost would be reduced by 20%. If you continue to do the job in-house: Your product now sells to the auto companies for $20.00 per unit. Fixed overhead (OH) charges to the auto product total $20,000 each year. Other costs are shown in the chart below. Direct Materials Direct Labor $7.75 $4.50 Manufacturing OH $4.10 Total Cost $16.35 The Manufacturing OH of $4.10 includes a variable cost of $3.75 and a fixed OH cost of $0.35 based on a production of 100,000 units annually. a) Analyze the costs. Should you accept the new vendor offer? Explain Why or why not? b) Assuming you want to use the new vendor for other business reasons, what is the maximum unit price that you should be willing to pay the new vendor?
Your procurement manager recently announced that a new vendor made an offer to provide soldering- only operations that meet all of the new no-lead environmental standards for the industry. You are interested because soldering is only one of the operations needed to produce the product, and you are expecting a new order which may exceed your own in-house soldering capacity. The new order would require that you meet the no-lead standards. If you do not use the outside company, you may have to add some capacity to meet the new order requirements. The outside firm quoted a delivered price of $4.50 per unit. Below are the options: Buy from new vendor or continue to do the job in-house: The direct labor and variable overhead cost for your auto product will be reduced by 15%. They also predict that your material cost would be reduced by 20%. If you continue to do the job in-house: Your product now sells to the auto companies for $20.00 per unit. Fixed overhead (OH) charges to the auto product total $20,000 each year. Other costs are shown in the chart below. Direct Materials Direct Labor $7.75 $4.50 Manufacturing OH $4.10 Total Cost $16.35 The Manufacturing OH of $4.10 includes a variable cost of $3.75 and a fixed OH cost of $0.35 based on a production of 100,000 units annually. a) Analyze the costs. Should you accept the new vendor offer? Explain Why or why not? b) Assuming you want to use the new vendor for other business reasons, what is the maximum unit price that you should be willing to pay the new vendor?
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
Section: Chapter Questions
Problem 1CE
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Question
Transcribed Image Text:Your procurement manager recently announced that a new vendor made an offer to provide soldering-
only operations that meet all of the new no-lead environmental standards for the industry. You are
interested because soldering is only one of the operations needed to produce the product, and you are
expecting a new order which may exceed your own in-house soldering capacity. The new order would
require that you meet the no-lead standards. If you do not use the outside company, you may have to
add some capacity to meet the new order requirements. The outside firm quoted a delivered price of
$4.50 per unit.
Below are the options:
Buy from new vendor or continue to do the job in-house: The direct labor and variable overhead cost
for your auto product will be reduced by 15%. They also predict that your material cost would be
reduced by 20%.
If you continue to do the job in-house: Your product now sells to the auto companies for $20.00 per
unit. Fixed overhead (OH) charges to the auto product total $20,000 each year. Other costs are
shown in the chart below.
Direct Materials
Direct Labor
$7.75
$4.50
Manufacturing OH
$4.10
Total Cost
$16.35
The Manufacturing OH of $4.10 includes a variable cost of $3.75 and a fixed OH cost of $0.35 based on a
production of 100,000 units annually.
a)
Analyze the costs. Should you accept the new vendor offer? Explain Why or why not?
b)
Assuming you want to use the new vendor for other business reasons, what is the maximum unit
price that you should be willing to pay the new vendor?
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