Ergo Products manufactures a variety of ergonomic household tools including a cordless drill.The cordless drill comes with a battery recharger.Currently,the company manufactures its own recharger for the drill with the following unit costs:
$\begin{array}{ll}
\text { Direct materials } & \$ 3.00 \
\text { Direct labour } & \$ 3.00 \
\text { Variable overhead } & \$ 1.00
\end{array}$

In addition,when 5000 rechargers are produced each year,Ergo applies $2 of fixed overhead costs to each recharger.Another manufacturer has offered to supply Ergo with a recharger at a cost of $8 each.If Ergo accepts the offer,80% of the fixed overhead allocated to the rechargers will be avoidable.
Required:
A. List at least two qualitative factors that Ergo Products should consider in this make or buy decision.
B. What is the relevant cost of each recharger if they make it themselves?
C. What is the relevant cost of each recharger if they outsource?
D. From a quantitative basis, should they make or buy the rechargers? By what amount will the company's net income increase or decrease if they outsource?

Question

Ergo Products manufactures a variety of ergonomic household tools including a cordless drill.The cordless drill comes with a battery recharger.Currently,the company manufactures its own recharger for the drill with the following unit costs:
$\begin{array}{ll}
\text { Direct materials } & \$ 3.00 \
\text { Direct labour } & \$ 3.00 \
\text { Variable overhead } & \$ 1.00
\end{array}$
 
In addition,when 5000 rechargers are produced each year,Ergo applies $2 of fixed overhead costs to each recharger.Another manufacturer has offered to supply Ergo with a recharger at a cost of $8 each.If Ergo accepts the offer,80% of the fixed overhead allocated to the rechargers will be avoidable.
Required:
A. List at least two qualitative factors that Ergo Products should consider in this make or buy decision.
B. What is the relevant cost of each recharger if they make it themselves?
C. What is the relevant cost of each recharger if they outsource?
D. From a quantitative basis, should they make or buy the rechargers? By what amount will the company's net income increase or decrease if they outsource?

Quizplus · Accepted Answer

The Answer of Ergo Products manufactures a variety of ergonomic household tools including a cordless drill.The cordless drill comes with a battery recharger.Currently,the company manufactures its own recharger for the drill with the following unit costs:
$\begin{array}{ll}
\text { Direct materials } & \$ 3.00 \
\text { Direct labour } & \$ 3.00 \
\text { Variable overhead } & \$ 1.00
\end{array}$
 
In addition,when 5000 rechargers are produced each year,Ergo applies $2 of fixed overhead costs to each recharger.Another manufacturer has offered to supply Ergo with a recharger at a cost of $8 each.If Ergo accepts the offer,80% of the fixed overhead allocated to the rechargers will be avoidable.
Required:
A. List at least two qualitative factors that Ergo Products should consider in this make or buy decision.
B. What is the relevant cost of each recharger if they make it themselves?
C. What is the relevant cost of each recharger if they outsource?
D. From a quantitative basis, should they make or buy the rechargers? By what amount will the company's net income increase or decrease if they outsource?