Question

For most construction projects, H55 Heating and Cooling buys sheet metal and forms the metal into heating/cooling ducts as needed. The company estimates the costs of making and installing ductwork for the Kerry Park shopping mall to be as follows:

Materials		$34,470
Labor to form ductwork		3,890
Labor to install ductwork		10,610
Miscellaneous variable installation costs		1,410
Fixed costs allocated based on labor hours		3,120
Total cost		$53,500

The fixed costs relate to the company’s building, equipment, and office staff. The company plans to bill the Kerry Park developer $68,000 for services. H55 is currently behind schedule on other projects and is paying a late penalty of $1,195 per day. Walt Bradley, the owner of H55 Heating and Cooling, is considering ordering prefabricated ductwork for the Kerry Park job. The prefabricated ductwork will cost $41,160 (including the cost of sheet metal). If Walt buys the prefabricated ductwork, he’ll be able to reassign workers to another project and avoid five days of late fees.

Should H55 make the ductwork or buy it prefabricated?

Net incremental cost or benefit of buying will be $_________. H55 should make or buy the prefabricated ductwork.

Answer 1

Solution:

1) Should H55 make the ductwork or buy it prefabricated?

We shall prepare the incremental analysis to analyze the incremental cost or benefit of buying the prefabrictaed duckwork , as under:

Incremental analysis
Incremental cost		($41,160)
Cost of prefabricated duckwork
Incremental savings
Materials cost	$34,470
Labor to form ductwork	$3,890
Late payment penalty($1,195 *5)	$5,975	$44,335
Incremental benefit(cost)		$3,175

Net incremental benefit of buying will be $3,175 . H55 should buy the prefabricated ductwork