Part 1

Acme’s Oakville plant produces two types of alternators – regular and heavy duty. The unit costs to produce the alternators are as follows:

Heavy duty / Regular
Direct materials / $190 / $80
Direct labour / 50 / 20
Variable overhead / 25 / 5
Direct fixed overhead / 20 / 10
Total / $285 / $115

Fixed overhead includes the following:

Supervisor salary$30,000

Depreciation on equipment 8,000

Rent for production facilities 22,000

A local supplier has offered to supply Acme with all the alternators it needs. The proposed price is $265 for heavy duty alternators and $145 for regular alternators; however, the offer is conditional on supplying both types of alternators. The supplier will not provide just one type for the prices quoted. If the offer is accepted, the production equipment used by Acme would be scrapped (it has no market value), and the rented facility would be closed. Acme sells 2,500 heavy duty alternators and 1,000 regular alternators per year.

Required

a. Should the alternators be purchased from the external supplier? Consider pros and cons of any proposal.

b. If the production facility is owned rather than rented, and the $22,000 is building depreciation expense rather than rent expense, what effect does this have on the analysis?

c. Assume that the volume of alternators sold each year is 5,000 heavy duty and 2,000 regular, and that fixed costs remain the same:

Supervisor salary$30,000

Depreciation on equipment 8,000

Rent for production facilities 22,000

Does this change the decision?

Part 2

Because of the downturn in the oil sector, Acme’s dump truck division is attempting to reduce manufacturing costs. It polled customers with respect to product requirements and obtained the following information:

Category / Importance
Driver comfort / 30
Fuel efficiency / 50
Safety / 20

Acme identified the following target costs for various truck components:

Function
group / Target cost
Frame / $30,000
Engine / 50,000
Body / 40,000
Other / 80,000

Acme engineers produced the following quality function deployment matrix:

Function group
Categories / Frame / Engine / Body / Other
Driver comfort / .2 / .2 / .6
Fuel efficiency / .6 / .3 / .1
Safety / .3 / .1 / .2 / .4

Required: Determine which function groups are candidates for cost reduction.