Question

Tony Hawk Inc. (Hawk) is a wholesale distributor supplying moderately priced sporting equipment to large chain stores. Hawk manufacturers and sells 20,000 tackle boxes annually, making full use of its direct labour capacity at available workstations. Following are the selling price and costs associated with Hawk’s tackle boxes:

Selling price per box		$86.00
Costs per box:
Direct material	$17.00
Direct labour	18.75
Fixed manufacturing overhead:
Depreciation on equipment ($65,000 / 20,000)	3.25
Production supervisor’s salary ($185,000 / 20,000)	9.25
Selling and administrative costs	17.00	65.25
Profit per box		$20.75

The company has looked into the possibility of outsourcing the tackle boxes. A supplier of high quality products has approached Hawk and would be able to provide up to 20,000 tackle boxes per year at a price of $54 per box delivered to Hawk’s facility.

The selling and administrative costs include $120,000 fixed cost for distribution of the product. Every unit of product that Hawk sells, whether outsourced or manufactured is allocated $6 of this fixed distribution cost. The remainder of the selling and administrative cost would be saved if the tackle boxes were outsourced.

REQUIRED:

Determine whether Tony Hawk Inc. should accept the supplier’s offer to provide 20,000 tackle boxes at $54 per box.

Answer 1

ANSWER: -

Tony Hawk Inc. should not accept the supplier’s offer to provide 20,000 tackle boxes at $54 per box because the annual financial disadvantage for the company as a result of buying tackle boxes from the outside supplier should be $145,000.

EXPLANATION: -

Differential analysis on make or buy decision of Tackle box

	Make	Buy
Direct material	20000 × $17 = 340,000
Direct labor	20000 × $18.75 = 375,000
Variable overhead	20000 × $11 = $220,000
Purchase cost		20000 × $54 =$1,080,000
Total relevant cost	$935,000	$1,080,000

Financial (disadvantage) = $935,000 - $1,080,000 = -$145,000

NOTE: - Depreciation of equipment, Production supervisor’s salary and fixed distribution cost are fixed costs that will not be affected by the decisions, therefore these costs are irrelevant to the Decision making. Hence they are ignored.