Zelean Manufacturing Uses 10 Units of Part KJ37 Each Month

question 30

Essay

Zelean Manufacturing uses 10 units of part KJ37 each month in the production of radar equipment. The cost to manufacture one unit of KJ37 is presented in the accompanying table. $\begin{array}{|l|r|}\hline \text { Direct materials } & \$ 1,000 \\\hline \begin{array}{l}\text { Materials handling (20\% of direct material } \\\text { cost) }\end{array} & 200 \\\hline \text { Direct labor } & 8,000 \\\hline\text { Manufacturing overhead } & 12,000 \\\hline \text { Total manufacturing cost } & \$ 21,200 \\\hline\end{array}$
Materials handling represents the direct variable costs of the receiving department and is applied to direct materials and purchased components on the basis of their cost. This is a separate charge in addition to manufacturing overhead. Zelean's annual manufacturing overhead budget is one-third variable and two-third fixed. Scott Supply, one of Zelean's reliable vendors, has offered to supply part KJ37 at a unit price of $15,000. The fixed cost of producing KJ37 is the cost of a special piece of testing equipment that ensures the quality of each part manufactured. This testing equipment is under a long-term, noncancelable lease. If Zelean were to purchase part KJ37, materials handling costs would not be incurred.
Required:
a. If Zelean purchases the KJ37 units from Scott, the capacity Zelean was using to manufacture these parts would be idle. Should Zelean purchase the parts from Scott? Make explicit any key assumptions.
b. Assume Zelean Manufacturing is able to rent all idle capacity for $25,000 per month. Should Zelean purchase from Scott Supply? Make explicit any key assumptions.
c. Assume that Zelean Manufacturing does not wish to commit to a rental agreement but could use idle capacity to manufacture another product that would contribute $52,000 per month. Should Zelean manufacture KJ37? Make explicit any key assumptions.

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Definitions:

Perfectly Competitive Firms

Companies that operate in a perfectly competitive market, producing homogeneous goods and having no control over market price.

Oligopolistic Market

A market structure characterized by a small number of firms that have significant control over market prices and competition.

Homogeneous Products

Products that are essentially identical, offered by different firms within a market, with no product differentiation.

Differentiated Products

Goods that are distinguished from similar products based on quality, features, and branding to create perceived differences appealing to diverse consumer segments.