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Should wc rent the additional machine

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Reference no: EM132528631

The Winery Company (WC) manufacturers wine coolers. WC manufacturers 2 types of coolers: regular and premium. The premium wine cooler uses a thermoelectric systen instead of a compressor-powered cooling system used in the regular cooler WC produces the compressor powered cooler but purchases the thermoelectric system from Thermo Inc for $50 per unit. Currently, WC produces and sells 1,000 units of each. The premium cooler requires a special machine to install the thermoelectric system, which is operating at capacity.

The data for the 2 production units is below

                                              Regular                                 Premium

Raw materials                     $70                                       $150 (includes $50 for thermoelectric system)

Labor 5hrs                       @ $10 8hrs                                @ $10

Variable overhead            $4 per                                   Direct Labor hours $3 per Direct Labor hours

Fixed overhead                   $5 per                               Direct Labor hours $4 per Direct Labor hours

Market price                      $200                                        $300

WC is considering whether to rent a plant for $10,000 per year to produce the 1,000 units of the thermoelectric systems instead of purchasing them. The budgeted costs per unit for 1,000 units (not including rent) are as follows:

Thermoelectric system

Raw materials $10

Direct Labor 1hr @ $10

Variable overhead $8 per Direct Labor hours

Fixed overhead $7 per Direct Labor hours

Capacity 2,000 units

  • WC would then have to ship the thermoelectric systems to its cooler plant at $6 per unit.

Question 1: Should the company continue to buy the thermoelectric system from Thermo Inc?

Question 2: WC is considering renting an additional machine ($5,000 annual rent) that can install the thermoelectric system in premium coolers. The marketing dept believes it can sell an additional 500 units but the market price for premium coolers will drop to 280 per unit. Should WC rent the additional machine?

Reference no: EM132528631

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