Fred's, Inc.
Fred's, Inc., is a wholesale distributor supplying a wide range of moderately priced sporting equipment to large chain stores.
About 60 percent of Fred's Inc. products are purchased from other companies, while the remaining products are manufactured by Fred's Inc.
The company's Plastics Department is currently manufacturing molded fishing tackle boxes.
Fred's Inc is able to manufacture and sell 8,000 tackle boxes annually, making full use of its direct labor capacity at available workstations.
Following are the selling price and costs associated with Fred's Inc. tackle boxes:
| Selling price per box |
|
|
$86.00 |
| Costs per box |
|
|
|
|
| |
Molded plastic |
|
$8.00 |
|
| |
Hinges, latches, handle |
$9.00 |
|
| |
Direct labor ($15/hour) |
$18.75 |
|
| |
Manufacturing Overhead |
$12.50 |
|
| |
Selling & Admin expenses |
$17.00 |
|
| |
Total |
|
|
$65.25 |
|
| |
Profit per box |
|
|
$20.75 |
Because Fred's Inc. believes it could sell 12,000 tackle boxes if it had sufficient manufacturing capacity, the company has looked into the possibility of purchasing the tackle boxes for distribution.
Sugar Products, a steady supplier of quality products, would be able to provide up to 9,000 tackle boxes per year at a price of $68 per box delivered to Fred's Inc facility.
Bart Johnson, Fred's product manager, has suggested that the company could make better use of its Plastics Department by manufacturing skateboards.
To support his position, Bart has a market study that indicates an expanding market for skateboards and a need for additional suppliers.
He believes that Fred's could expect to sell 17,500 skateboards annually at a price of $45 per skateboard.
Bart's estimate of the costs to manufacture the skateboards follows:
| Selling price per skateboard |
|
|
$45.00 |
| Costs per skateboard |
|
|
|
| |
Molded plastic |
|
$5.50 |
|
| |
Wheels, hardware |
|
$7.00 |
|
| |
Direct labor ($15/hour) |
$7.50 |
|
| |
Manufacturing Overhead |
$5.00 |
|
| |
Selling & Admin expenses |
$9.00 |
|
| |
Total |
|
|
$34.00 |
|
| Profit per skateboard |
|
|
$11.00 |
In the Plastic Department, Fred's uses direct labor hours as the application base for manufacturing overhead.
Included in the manufacturing overhead for the current year is $50,000 of factory-wide, fixed manufacturing overhead that has been allocated to the Plastics Department.
For each unit of product that Fred's Inc sells, regardless of whether the product has been purchased or is manufactured by Fred's Inc, an allocated $6 fixed overhead cost per unit for distribution is included in the selling and administrative expenses for all products.
Total selling and administrative expenses for the purchased tackle boxes would be $10 per unit.
1) Prepare an analysis based on the data presented that will show which product or products Fred's, Inc., should manufacture and/or purchase in order to maximize the company's profitability. It should also show the associated financial impact. Support your answer with appropriate calculations.
2) Discuss some qualitative factors that might affect Fred's Inc's decision.