Reference no: EM132817225
Problem - Roll and Wind Cable, Inc. ("R&W") manufactures 15,000 rolls of cable each period. The cable is used as an input for producing several other products that R&W manufactures. For a 100-roll batch, R&W's manufacturing costs are:
Direct materials $125
Direct labor 85
Manufacturing overhead 400
Total $610
Included in manufacturing overhead is $215 per batch related to annual depreciation expenses and insurance cost on production facilities and production equipment. No other costs or expenses need to be considered.
An outside supplier has offered to sell R&W the 15,000 rolls of cable necessary to meet production needs this period for a lump-sum of $65,000. If R&W accepts the outside supplier's bid, they will have excess production capacity that can be used to generate $12,000 of additional income.
Assume that using the outside supplies will not impact the company's sales activities.
Required -
1. Using the given information, evaluate and provide advice to the company regarding accepting or rejecting the outside supplier's offer. Assume that, if they decide to accept the outside vendor's offer, Roll & Wind will have to divert the time of one of their existing employees to manage the supply chain associated with using the outside vendor. Currently, that employee is paid $50,000.
2. Using the same information, re-evaluate the outside suppliers offer, with the additional facts:
a. R&W is not able to generate additional from their excess production capacity and
b. They will incur additional costs and income associated with the shut-down/removal of the excess capacity:
i. $15,000 of cost related to retiring and removing production equipment,
ii. The retired equipment will generate about $5,000 of income as salvage, and
iii. $2,500 of expenses related to cleaning and refurbishing the cleared production space.
3. Before making a final decision, suggest at least 3 qualitative, i.e. non-quantitative factors, the company should consider before accepting or rejecting the suppliers offer.