Should Bradley make the ductwork or buy it prefabricated Pro

Should Bradley make the ductwork or buy it prefabricated?

Problem 7-4. Make-or-Buy Decision [LO 1]

For most construction projects, Bradley Heating and Cooling buys sheet metal and forms the metal into heating/cooling ducts as needed.

The company extimates the costs of making and installing ductwork for the Kerry Park shopping mall to be as follows:

Materials

$        35,000

Labor to form ductwork

4,000

Labor to install ductwork

10,000

Miscellaneous variable costs

1,500

Fixed costs allocated based on labor hours

3,000

Total cost

$        53,500

The fixed costs relate to the company\'s building, equipment, and office staff. The company plans to bill the Kerry Park developer $68,000 for services.

Bradley is currently behind schedule on other projects and is paying a late penalty of $1,200 per day. Walt Bradley, the owner of Bradley Heating and Cooling,

is considering ordering prefabricated ductwork for the Kerry Park job. The prefabricated ductwork will cost $42,000 (including the cost of sheet metal).

If Walt buys the prefabricated ductwork, he\'ll be able to reassign workers to another project and avoid five days of late fees.

Required

Should Bradley make the ductwork or buy it prefabricated?

Solution

Total Cost if Made Materials $        35,000 Labor to form ductwork              4,000 Labor to install ductwork            10,000 Miscellaneous variable costs              1,500 Fixed costs allocated based on labor hours              3,000 Total cost 53500 Total Cost if Purchased Cost to buy prefabricated duct 68000 Less: Saving of penalty [1200*5day] -6000 Cost if purchased from outside 62000 Its better o prepare the duct inhouse as cost is less Fixed cost is ignrored because it will be incurring whether or not product is made or purchased