fourie enterprises _ blaster flamethrowers

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Relevant Costs for Decision Making

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Fourie enterprises, buy or manufacture alternatives

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Page 1: Fourie Enterprises _ blaster flamethrowers

Relevant Costs for Decision Making

Page 2: Fourie Enterprises _ blaster flamethrowers

The Blaster • A flamethrower is a mechanical incendiary device

designed to project a long controllable stream of fire. They were first used during World War I, and widely used in World War II.

• The Blaster (also called the "BMW Flamethrower") was a 1998 invention by South African inventor Charl Fourie designed to provide a defense against carjackings.

Page 3: Fourie Enterprises _ blaster flamethrowers

Make versus buy, activity-based costing, opportunity costs

Page 4: Fourie Enterprises _ blaster flamethrowers

Fourie Enterprises • Fourie Enterprises produces Blaster brand

flamethrowers. • This year’s expected production is 20,000 units.

Currently, Fourie Enterprises makes the nitrogen propellant tank (NPTs) for its flamethrowers.

• Each flamethrower includes two side NPTs. • Fourie Enterprises’ management accountant

reports the following costs for making the 40,000 NPTs:

Page 5: Fourie Enterprises _ blaster flamethrowers

Cost per Unit

Costs for 40,000 Units

Direct materials $5.00 $200,000.00

Direct manufacturing labor $2.50 $100,000.00

Variable manufacturing overhead

$1.25 $50,000.00

Inspection, setup, materials handling

$4,000.00

Machine rent $8,000.00

Allocated fixed costs of plant administration, taxes, and insurance

$50,000.00

Total costs $412,000.00

Page 6: Fourie Enterprises _ blaster flamethrowers

• Fourie Enterprises has received an offer from an outside vendor to supply any number of NPTs Fourie Enterprises requires at $9.25 per NPT. The following additional information is available:

• Inspection, setup, and materials-handling costs vary with the number of batches in which the NPTs are produced. Fourie Enterprises produces NPTs in batch sizes of 1,000 units. Fourie Enterprises will produce the 40,000 units in 40 batches.

• Fourie Enterprises rents the machine used to make the NPTs. If Fourie Enterprises buys all of its NPTs from the outside vendor, it does not need to pay rent on this machine.

Page 7: Fourie Enterprises _ blaster flamethrowers

Required: • Assume that if Fourie Enterprises purchases

the NPTs from the outside vendor, the facility where the NPTs are currently made will remain idle.

• On the basis of financial considerations alone, should Fourie Enterprises accept the outside vendor’s offer at the anticipated volume of 40,000 NPTs?

• Show your calculations.

Page 8: Fourie Enterprises _ blaster flamethrowers

• For this question, assume that if the NPTs are purchased outside, the facilities where the NPTs are currently made will be used to upgrade the flamethrowers by adding a rotisserie attachment.

• (Note: Each flamethrower contains two NPTs and one rotisserie attachment.)

• As a consequence, the selling price of flamethrowers will be raised by $30. The variable cost per unit of the upgrade would be $24, and additional tooling costs of $100,000 per year would be incurred.

• On the basis of financial considerations alone, should Fourie Enterprises make or buy the NPTs, assuming that 20,000 flamethrowers are produced (and sold)? Show your calculations.

Page 9: Fourie Enterprises _ blaster flamethrowers

• The sales manager at Fourie Enterprises is concerned that the estimate of 20,000 flamethrowers may be high and believes that only 16,000 flamethrowers will be sold. Production will be cut back, freeing up work space.

• This space can be used to add the rotisserie attachments whether Fourie Enterprises buys the NPTs or makes them in-house.

• At this lower output, Fourie Enterprises will produce the NPTs in 32 batches of 1,000 units each.

• On the basis of financial considerations alone, should Fourie Enterprises purchase the NPTs from the outside vendor? Show your calculations.

Page 10: Fourie Enterprises _ blaster flamethrowers

The Blaster This image cannot currently be displayed.

Page 11: Fourie Enterprises _ blaster flamethrowers

1. Relevant costs under buy alternative: Purchases, 40,000 × $9.25 $370,000 Relevant costs under make alternative: Direct materials $200,000 Direct manufacturing labor 100,000 Variable manufacturing overhead 50,000 Inspection, setup, materials handling 4,000 Machine rent 8,000 Total relevant costs under make alternative $362,000

Page 12: Fourie Enterprises _ blaster flamethrowers

• The allocated fixed plant administration, taxes, and insurance will not change if Fourie Enterprises makes or buys the NPTs.

• Hence, these costs are irrelevant to the make-or-buy decision.

• The analysis indicates that it is less costly for Fourie Enterprises to make rather than buy the NPTs from the outside supplier.

Page 13: Fourie Enterprises _ blaster flamethrowers

2. Relevant costs under the make alternative: Relevant costs (as computed in requirement 1) $362,000 Relevant costs under the buy alternative: Costs of purchases (40,000 × $9.25) $370,000 Additional fixed costs $100,000 Additional contribution margin from using the space where the NPTs were made to upgrade the flamethrowers by adding rotisserie attachments, 20,000 × ($30 – $24) (120,000) Total relevant costs under the buy alternative $350,000

Page 14: Fourie Enterprises _ blaster flamethrowers

• Consequently, Fourie Enterprises should buy the side NPTs from an outside vendor and use its own capacity to upgrade its flamethrowers.

Page 15: Fourie Enterprises _ blaster flamethrowers

3. In this requirement, the decision on making the rotisserie attachments is irrelevant to the analysis because the rotisserie attachments increase operating income and they will be made whether the NPTs are purchased or made. Relevant cost of manufacturing NPTs: Variable costs, ($5 + $2.50 + $1.25 = $8.75) × 32,000 $280,000 Batch costs, $100/batcha ×32 batches 3,200 Machine rent 8,000 $291,200 Relevant cost of buying NPTs, $9.25 × 32,000 $296,000 a$4,000 ÷ 40 batches = $100 per batch In this case, Fourie Enterprises should make the NPTs.

Page 16: Fourie Enterprises _ blaster flamethrowers