Reference no: EM132642695

Up until this point, Kane Lifestyle has been buying the gas lift mechanisms for their chairs. They are now considering whether or not they should make these parts themselves. An analysis of the accounting records and the production data revealed the following information

1. They currently purchase and use 8000 gas lift mechanisms a year
2. Currently, the gas lift mechanisms cost $40 each from the supplier. Delivery costs are $1.50 per unit, and a part-time dispatch employee involved in the process earns $17 000 per year. These costs would be eliminated if the gas lift mechanism is produced
3. If they start producing the gas lift mechanisms they would need two new full time employees (1920 hours each per year) producing the Gas Lift mechanisms. Each employee is paid $30 per hour
4. A new machine would need to be purchased for $80,000 to allow them to manufacture the parts
5. The cost of materials per Gas Lift mechanism is $6.

Manufacturing costs directly applicable to the production of Gas Lift mechanisms are:

Indirect labour. $15,000

Utilities. 3,000

Depreciation 3,600

Rates and insurance 2000

Problem 1: Should Kane Lifestyle make or buy the Gas Lift mechanisms? Show all calculations.

• Cost
• Make
• Buy