Question

Question 2:

Makita Inc. manufactures a variety of battery-powered hand tools. The company has assembled the following data pertaining to its two most popular products:

	Drill	Saw
Direct Materials	$60	110
Direct Labour	40	90
Manufacturing Overhead*	160	320
Cost if purchased from outside supplier	200	380
Annual Demand in units	200,000	220,000

* The manufacturing overhead is applied at a rate of $80 per machine hour used in production. Twenty five percent of the MOH is variable in nature and the remaining seventy five percent is fixed. Makita only has 500,000 hours of machine time available for making these two tools this year. When Makita cannot satisfy the demand for its products, the company will buy units from an outside supplier.

Required:

How should Makita use this year’s limited supply of machine hours? How many of each product should they make themselves and how many units should be purchased from the outside supplier?

Answer 1