Question

1. Washington Company calculated that the cost to manufacture part Q43 is comprised of the following:

Materials                     $97

Variable overhead          25

Variable labour               53

Fixed overhead               22

Another company has offered to make part Q43 for $125.

If Washington has spare capacity and will retain its highly-skilled workforce no matter which decision is made, identify whether it should make or buy the component. Be sure to show all calculations.

2. Pizza Planet employs a full-time driver and pays the costs for a delivery vehicle to deliver pizza to its take-out customers. Rapid Delivery has offered to make these deliveries with the same service standard for a fixed sum of $2,650 per month. Pizza Planet’s annual costs are as follows:

Salary and costs of driver                                           $23,350

Registration, insurance & service - automobile             3,500

Fuel                                                                                 2,750

Depreciation – automobile                                             2,900

Total annual cost                                                        $32,500

If Pizza Planet outsources delivery to Rapid Delivery, it will terminate the driver’s employment without any severance payments.

a) Should Pizza Planet subcontract its delivery service to Rapid Delivery?

Answer 1