Question

Easypull Corporation manufactures a specialty tool called Yank-it-Off used by roofing contractors to remove old shingles from rooftops. In 2017, Easypull manufactured and sold 30,000 such tools. Total manufacturing costs incurred in 2017 are summarized below:

Direct Materials $210,000

Direct Manufacturing Labor 120,000

Lease on Manufacturing Facility 90,000

Leases on Manufacturing Equipment 36,000

Miscellaneous Manufacturing Overhead 220,000

Total Manufacturing Costs $676,000

For Year 2018, Easypull expects to sell 36,000 Yank-it-Off tools. Unfortunately, the existing manufacturing capacity is only 30,000 tools. Adding additional capacity is not possible, so Easypull has identified a supplier who is willing to manufacture the tool. The supplier has offered to sell Easypull the 6,000 tools they need at a price of $20.50 each. However, the supplier has also offered to provide all 36,000 tools to Easypull for $19.00 each.

Easypull is considering both offers and has further analyzed its manufacturing costs. The price of direct materials is expected to increase by 5% in 2018. Direct labor costs are expected to increase by 2% in 2018. Lease costs will increase 6% in 2018. The lease contract on the manufacturing facility can be cancelled; however, Easypull would be required to pay an early termination penalty of $75,000. Equipment leases could be terminated without penalty. An analysis of miscellaneous manufacturing overhead indicates that 75% of these costs are fixed and would remain even if manufacturing is discontinued. For 2018, variable miscellaneous manufacturing overhead costs are expected to rise 4%, and fixed miscellaneous manufacturing overhead costs are expected to increase 3%.

Required:

Assuming your decision is based upon maximizing profits in 2018:

a. What is the financial advantage (or disadvantage) of discontinuing manufacturing operations and purchasing all 36,000 units from the outside supplier? (1 extra credit point)

b. For Easypull to discontinue manufacturing the tool, how much would the outside supplier need to charge per unit for all 36,000 units? In other words, what is the breakeven point in this situation; the price in which Easypull’s total cost for the 36,000 units would be the same under either scenario? Round your answer to the nearest cent. (1 extra credit point)

Answer 1