SNYDER CORPORATION
The SNYDER CORPORATION produces gas grills. This year's expected production is 20,000 units. Currently SNYDER makes the side burners for its grills. Each grill includes two side burners. SNYDER'S management accountant (that's you) reports the following costs for making the 40,000 burners:
Cost Per Unit Costs for 40,000 Units
Direct materials $5.00 $200,000
Direct labor 2.50 100,000
Variable overhead 1.25 50,000
Inspection, setup, material handling 4,000
Machine rent 8,000
Allocated fixed costs of plant administration,
taxes, and insurance 50,000
$412,000
SNYDER has received an offer from an outside vendor to supply any number of burners SNYDER requires at $9.25 per burner. The following additional information is available:
Inspection, setup, and materials handling costs vary with the number of batches in which the burners are produced. SNYDER produces burners in batch sizes of 1,000 units. SNYDER will produce the 40,000 units in 40 batches.
SNYDER rents the machine used to make the burners. If SNYDER buys all its burners from the outside vendor, it does not need to pay rent on this machine.
REQUIRED:
Assume that if SNYDER purchases the burners from the outside vendor, the facility where the burners are currently made will remain idle. On the basis of financial considerations only, should SNYDER accept the outside vendor's offer at the anticipated volume of 40,000 burners? Show all work.
For this question, assume that if the burners are purchased outside, the facilities were the burners are currently made will be used to upgrade the grills by adding a rotisserie attachment. (Note: Each grill contains two burners and one rotisserie attachment). As a consequence, the selling price of grills will raised by $30. The variable cost per unit of the upgrade would be $24, and additional tooling costs of $100,000 per year would be incurred. On the basis of financial considerations alone, should SNYDER make or buy the burners, assuming that 20,000 grills are produced and sold? Show all work.
The sales manager at SNYDER is concerned that the estimate of 20,000 grills may be high and believes that only 16,000 grills will be sold. Production will be cut back, freeing up works space. This space can be used to add the rotisserie attachments whether SNYDER buys the burners or makes them in-house. At this lower output, SNYDER will produce the burners in 32 batches of 1,000 units each. On the basis of financial considerations alone, should SNYDER purchase the burners from the outside vendor? Show all work.