Pierce Firetrucks is a large-scale manufacturer of fire trucks for local fire departments. Throughout the years, they have consistently manufactured all components for their trucks in-house. Recently, they have found a vendor for the chassis of the firetruck that would be willing to sell them the chassis for $8,250. After gathering information from the accounting department, management has found the following with regard to the current cost levels when producing 2,500 trucks.
Direct Materials: $10,000,000
Direct Labor: $15,000,000
Management has also identified that manufacturing overhead costs incurred over the same period for the production of the chassis is represented by the following cost behavior equation: Y = $50X + $5,000,000.
If the part were to be outsourced, 10% of total fixed manufacturing overhead would be eliminated, and the facilities freed up could be rented out to generate $650,000 in rental income to offset any additional costs from outsourcing the product.
Assuming that 3,500 units will need to be produced next year, which of the following statements is incorrect?
Question 8 options:
In addition to the quantitative aspects of the analysis, Pierce should also consider the qualitative aspects in order to make sure that outsourcing the chassis makes sense for the company's strategy.
At a purchase price of $10,250, the cost to make is less than the cost to buy.
If Pierce decides to outsource the production of the chassis, operating income will increase by $7,450,000.
The total cost to make the part in-house next year is $40,175,000.
At a purchase price of $10,378.57 (rounded), Pierce would be indifferent between making and outsourcing the chassis.