Kleindale Company Currently Manufactures a Subassembly for Its Main Product

question 15

Essay

Kleindale Company currently manufactures a subassembly for its main product. The costs per unit are as follows:
Direct materials $ 1.50
Direct labour 15.00
Variable overhead 8.00
Average fixed overhead 32.00
Total $56.50
Merriman Corp has contacted Kleindale with an offer to outsource 5,000 subassemblies for $40.00 each. Kleindale would eliminate $100,000 of fixed overhead if it accepts the proposal.
a)Should Kleindale make or buy the subassemblies? Provide calculations to support your answer.
b)At what volume of subassembly production would Kleindale generally be indifferent to making or buying the subassembly?
c)List two qualitative factors that might influence this make or buy decision.

---

Definitions:

Growth Rate

The rate at which a company's earnings or revenue increases over a certain period, often used as a measure of a company's financial health and potential for future expansion.

Intrinsic Value

The real or fundamental value of a stock, determined through analysis of the company's financials and potential.

Constant-Growth DDM

A version of the dividend discount model that assumes dividends grow at a constant rate indefinitely.

Dividend

Funds disbursed by a corporation to its owners, often from the company's profits, as a profit sharing.