Coleman Company owns a machine that produces a component for the products the company makes and sells. The company uses 1,800 units of this component in production each year. The costs of making one unit of this component are Direct material $ 7 Variable manufacturing overhead 6 Direct labor 4 Fixed manufacturing overhead 5 The fixed overhead costs are unavoidable, and the unit cost is based on the present annual usage of 1,800 units of the component. An outside supplier has offered to sell Coleman this component for $18 per unit and can supply all the units it needs.

Should Coleman make or buy the component?

Difference=$1,800

This shows if Coleman buys, the net income will decrease by $1,800. So Coleman should make components.

Explanation:

Given Data:

Direct material=$7

Variable manufacturing overhead=$6

Direct labor=$4

Fixed manufacturing overhead=$5

Required:

Should Coleman make or buy the component?

Solution:

Total Variable cost=Direct material+Variable manufacturing overhead+Direct labor

Total Variable cost=$7+$6+$4

Total Variable cost=$17

Cost From making=Units*Total Variable cost

Cost From making=1800*$17

Cost From making=$30,600

Supplier Price=$18

Cost From Buying=1800*$18

Cost From Buying=$32,400

Difference=Cost From Buying-Cost From making

Difference=$32,400-$30,600

Difference=$1,800

This shows if Coleman buys, the net income will decrease by $1,800. So Coleman should make components.

ROP = 150*1+(2.326*40*1) = 243.04 = 243 units (approx)

Explanation:

Given information -

c = 2.95 $/unit

Annual holding cost = 0.2*2.95 = 0.59 $/unit

Q = 300 units (EOQ)

L = 1 week

Mean demand = 150 units/week

σ= 40 units/week

z = 2.326 at 99 percent service level (1% stock out)

a) Reorder point = Average daily demand + Safety stock = dL+(z σ*\sqrt{L})

ROP = 150*1+(2.326*40*1) = 243.04 = 243 units (approx)