Financial Decision Making: Manufacturing Canisters or Cups

This assignment provides a comprehensive analysis of production costs, comparing the costs of manufacturing canisters with purchasing them from an outside supplier. It begins by calculating the cost per unit under a traditional approach, considering direct materials, labor, and overhead. The analysis then assesses the financial implications of purchasing the canisters, factoring in unavoidable fixed costs. A key component of the assignment involves evaluating a special offer, calculating the cost per unit for a specific production quantity, and determining whether to accept the offer. Furthermore, the assignment delves into the profitability of manufacturing both canisters and coffee cups, comparing their respective profits and recommending the most financially viable option. The assignment concludes with a discussion of additional factors that the firm should consider, such as alternative options, raw material availability, labor costs, impact on existing business, customer preferences, and future plans, before making a final decision on whether to manufacture or purchase the canisters. The analysis includes detailed calculations and recommendations to guide financial decision-making.

Solution:
(a) Calculation of the cost per unit of producing the canisters under the
traditional approach
Particulars Amount ($)
Direct material 300,000.00
Direct labour (12,000*15) 180,000.00
Variable overhead (12,000*10) 120,000.00
Fixed overhead (12,000*45) 540,000.00
Total Cost 1,140,000.00
No. of Units 760,000.00
Cost per unit 1.50
The cost per unit of producing the canisters under the traditional approach is $
1.50.
(b) Calculation of the cost of purchasing the canisters
Particulars Amount ($)
Cost of purchase $1
No. of units 760,000
Total purchase cost $760,000
Add: Unavoidable fixed costs (540,000-80,000-28,000) $432,000
Total costs $1,192,000
Cost per unit $1.57
The cost of purchase is $1.57 whereas the cost to manufacture is $1.50. So, the
company should manufacture the canisters.
(c) Analysis of special offer
Particulars Amount ($)
Direct material (20,000*300,000/760,000) 7,895
Direct labour (20,000*180,000/760,000) 4,737
Variable overhead (20,000*120,000/760,000) 3,158
Total Cost 15,789
Units 20,000
Cost per unit 0.79
The offered price for special offer is $1.40 and cost per unit of manufacturing this
special offer is $0.79. So, the offer should be accepted.

(d)Other factors that the firm should consider before deciding whether to
accept the order are as below:
(i) Alternative Options – Company needs to see if any better option available
in the market or not. If better option is available, company should go for
better alternative and reject this proposal.
(ii) Availability of Raw Material – It is important to consider the sufficient raw
material at the existing or lower price in the market before the company
accept the order. If sufficient raw material is not available or available at
higher price, decision regarding acceptance or rejection may change.
(iii) Availability of Labour – Like material, availability of sufficient labour at the
existing or lower price needs to be assured before accepting the project.
Usually the labour costs increase with the increase in the demand which
may impact the decision.
(iv) Impact on existing business – If the existing customers come to know of
this new pricing, then they may also demand the price cut from the
company. This will directly impact the profitability of the company.
Therefore a confidentiality clause to this effect is better in such cases.
(v) Increase in indirect staff – There may be possibility to hire a new staff
personal take care of this new project. Company should also consider the
cost of this new staff and its related costs (recruitment costs, etc.).
(e)Manufacturing of coffee cup or canisters
Profit from manufacturing coffee cups
Particulars Amount ($)
Direct material 0.60
Direct labour 0.20
Variable overhead 0.10
Fixed overhead 0.15
Cost per unit 1.05
Selling Price 1.20
Profit 0.15
No. of units 400,000
Total Profit 60,000
Profit from manufacturing canisters

Particulars Amount ($)
Direct material 300,000.00
Direct labour (12,000*15) 180,000.00
Variable overhead (12,000*10) 120,000.00
Fixed overhead (12,000*45) 540,000.00
Total Cost 1,140,000.00
No. of Units 760,000.00
Cost per unit 1.50
Selling Price per unit (760,000*0.70) 2.20
Profit per unit (SP-Cost) 0.70
Total profit 532,000.00
The profit from manufacturing coffee cups is $60,000 whereas the profit from
manufacturing canisters is $ 532,000. So, the company should manufacture
canisters.
(f) Other factors that should be considered whether to manufacture the
canisters or purchase them from the outside supplier
(i) Additional offers available – if there are other manufacturing offers
available with the company which can generate more revenues to the
company rather than producing canisters, then the company should adopt
the other alternatives.
(ii) Make cost or purchase cost – the company needs to access the
manufacturing cost and purchase cost. If the canisters are available at a
cost lower than the manufacturing cost and the company can avoid fixed
costs also. Then the company should go for purchasing them from
outside.
(iii) Benefit of opportunity costs – If the company can take the benefit or
utilize the costs from non-manufacturing of canisters and can generate
additional revenue from these costs. Then the company should go for
purchasing the canisters from outside rather manufacturing.
(iv) Customer preferences – If the customer is specific to a product and
purchasing the product from outside does not meets the customer
requirements, then the company should manufacture the product in house
as the customer satisfaction is of utmost priority and maintaining
customers are most important.
(v) Future Plans – Further, the company needs to access its future expansion
plans and funding requirements. After considering the financial impacts

and future predictions, the company should decide whether to
manufacture the product or purchase it.
(vi) Other economic and political benefits – If there are other political or
economic benefits are available then the company should go with the
option more profitable for the company.