Reference no: EM132559029

Green Cord Company manufactures a variety of IPhone charging cords. The company has just received an offer from an outside supplier to provide the fabric cording, at a price of $0.50 per five cords. The company is interested in this offer because its own production of cording is at capacity.

Green Cord Company estimates that if the supplier's offer were accepted, the direct labor and variable manufacturing overhead costs would be reduced by 12% and the direct materials cost would be reduced by 18%. Under present operations, Green Cord Company manufactures all of its charging cords. The charging cords are sold through wholesalers at $5 per box. Each box contains five cords. Fixed manufacturing overhead costs total $50,000 each year.

The present cost of producing five charging cords (one box) is given below:

Direct Material $1.60

Direct Labor $1.10

Manufacturing OH $0.74 (variable and fixed)

Required:

Question 1: Should Green Cord Company accept the outside supplier's offer? Show computations.

Question 2: Explain opportunity costs as it relates to part (3).

Question 3: Green Cord Company expects to sell 175,000 boxes of charging cords next year. As previously stated, the company presently has enough capacity to produce the cords for only 100,000 boxes of charging cords annually. By incurring $42,000 in additional fixed cost each year, the company could expand its production of cords to satisfy the anticipated demand for charging cords. The variable cost per unit to produce the additional cords would be the same as at present. Under these circumstances, should Green Cord accept the outside offer? How many boxes of cords should be purchased from the outside supplier and how many should be made by Green Cord? Show computations to support your answer.