Question

Exercise 7-12

Oak produces whirlpool tubs. Currently the company uses internally manufactured pumps to power water jets. Oak has found that 40 percent of the pumps have failed within their 12-month warranty period, causing huge warranty costs. Because of the company’s inability to manufacture high-quality pumps, management is considering buying pumps from a reputable manufacturer that also will bear any related warranty costs. Oak’s unit cost of manufacturing pumps is $88 per unit, which includes $17 of allocated fixed overhead (primarily depreciation of plant and equipment). Also, the company has spent an average of $20 (labor and parts) repairing each pump returned. Oak can purchase pumps for $82 per pump.

During 2017, Oak plans to sell 15,800 whirlpools (requiring 15,800 pumps). Determine whether the company should make or buy the pumps.

The company should

buy or make

the pumps.

Determine the total amount of cost savings related to the better alternative.

The total amount of cost savings

$

Answer 1

	Make	Buy	COST Saving on making
Relevant Manufacturing Cost	1,121,800
(88-17)*15800
Reapiring Cost of Returned Pumps	126,400
(15800*40%)*20
Purchase Price		1,295,600
(15800*82)
Total	1,248,200	1,295,600	47,400
1) Company should make pumps to save $47400