Reference no: EM133004304
Question - Exquisite Cup Brewing, a division of Modern Conveniences Inc. is a firm that manufactures several types of high-quality cutting edge appliances. One of the company's product lines consists of multi-function coffee makers. The company produces three different models of coffee makers. Exquisite Cup is presently considering a proposal from a supplier who wishes to supply the company with glass carafes for the coffee makers.
The company currently produces all of the carafes it requires. Because customers have differing preferences, Exquisite Cup now offers two alternative carafes for each coffeepot model (therefore, the company currently produces a total of six different types of carafes). The Supplier has indicated it would produce three different types of carafes for each coffeepot model, thus expanding the variety of carafes that could be offered to the customer. This supplier would charge Exquisite Cup $ 2.60 per carafe.
Exquisite Cup produces its carafes along with all the other coffee maker components in its factory in Hamilton, Ontario. For the coming year, Exquisite Cup has projected the costs of carafe production as follows (based on a projected volume of 100,000 units):
Direct materials $75,000
Direct labor 65,000
Variable overhead $55,000
Fixed overhead:
Depreciation on equipment 150,000
Property taxes on production space 215,000
Factory supervision 334,970
Total production costs $294,970
1. The equipment used to produce the carafes has no alternative use and no material market value.
2. The space occupied by carafe production activities has no use for the company if the company purchases rather than make the carafes.
3. The factory supervision cost reflects the salary of a production supervisor who oversees carafe production. This individual would be dismissed from the firm if the carafe production ceased.
Required -
a. Should the company commence purchasing carafes from this supplier for the coming year? Support your decision with numerical analysis and indicate what advantage/disadvantage accepting the proposal would be.
b. Determine the level of coffee maker production at which Exquisite Cup would be indifferent between buying and producing the carafes, If the volume of production were expected to increase in the future, would the firm be more likely to make or buy?
c. For this part only, assume that space presently occupied by carafe production could be leased to another firm for $4,600 per month. How would this affect the make-or-buy decision?
d. What other factors should the company take into account in determining whether it should make or buy the carafes?
e. Assume that Exquisite Cup is currently experiencing a $25,000 loss from operations. The company has an opportunity to sell an additional 10,000 carafes to a foreign distributor. Exquisite Cup has the capacity to produce the additional carafes and no opportunity costs are associated with the order. What is the minimum price per carafe that the company should charge for the special order? What price should the company charge if it wants to achieve a $5,000 target income?