Reference no: EM132915873
Question - Avlon Products currently purchases BBQ sauce from an external supplier but is thinking about bringing it in-house. Currently, Avlon acquires 500 barrels (100,000 gallons) of BBQ sauce on a monthly basis. Each barrel of BBQ sauce cost $64 per barrel. Transportation costs were paid by Avlon and were $8 per barrel. Avlon runs production 24 hours a day for five days a week (each day has three separate eight-hour shifts).
The average worker wage was $20/per HR. Workers take an average of 10 minutes to handle each barrel (including sanitation, adding other components, etc.). Additional procurement costs (including overhead) were $0.02 per gallon.
If Avlon were to instead produce the product internally, the following would occur:
-The mix would be 60% ketchup, 20% mayo, and 20% water.
-Ketchup would cost $0.15 per gallon, including freight.
-Mayo costs $0.1875 per gallon but is delivered in 15,000 gallon quantities.
-Water would only cost $0.025 per gallon.
-The production department believes the change to in-house would not require any incremental workers. However, producing in-house would take up more of the current staff's time.
-It is estimated that moving in-house would lead to total other costs (DL and MOH) of approximately $0.105 per gallon of BBQ sauce. This was under an assumption of standard costing.
Based on the previous factors, should Avlon make or buy this product? Calculate and compare the cost to make vs the cost to buy to help make your decision. Also consider qualitative factors in your analysis.