Question

Collaborative Learning Case (pg. 480-481) 1. 11-43 MAKE VERSUS BUY, GOVERNANCE. Lynn Hardt, a management accountant with the Paibec Corporation, is evaluating whether a component, MTR-2000, should continue to be manufactured by Paibec or purchased from Marley Company, an outside supplier. Marley has submitted a bid to manufacture and supply the 32,000 units of MTR-2000 that Paibec will need for 2019 at a unit price of $17.30, to be delivered according to Paibec's production specifications and needs. While the contract price of $17.30 is only applicable in 2019, Marley is interested in entering into a long-term arrangement beyond 2019. LO 1,2,3 1. Hardt forecast to make 32,000 units, $714,840 From plant records and interviews with John Porter, the plant manager, Hardt gathered the following information regarding Paibec's costs to manufacture 30,000 units of MTR-2000 in 2018: 13 | 4 Direct materials 5 Direct manufacturing labour 6 Plant space rental 7 Equipment leasing 8 Other manufacturing overhead 9 Total manufacturing costs Costs for 30,000 Units in 2018 $195,000 120,000 84,000 36,000 225,000 $660,000

Answer 1

Answer-1:

STATEMENT OF INCREMENTAL ANALYSIS Net income Make Buy increase/ MTR-2000 MTR-2000 (decrease) Outsourcing buy cost (32,000 $17.30) 553,600 $ (553,600) Direct materials 224640 224,640 Direct labour 134400 134,400 Variable overhead 100800 100,800 Fixed overhead 135000 135,000 Plant space rental 84000 84,000 Equipment leasing 36000 36,000 Termination cost of plant rental contract Ś 10,000 (10,000) Termination cost of equipment leasing 3,000 $ (3,000) Total cost 714,840 566,600 $ 148,240 s

Comment: As there is a saving of $148,240 if MTR-2000 is bought from Marley Company, Paibec should buy MTR-2000.

Note:- Direct material cost = 32,000 × [($195,000 / 30,000) + 8%] = $224,640

Direct labour cost = 32,000 × [($120,000 / 30,000) + 5%] = $134,400

Variable overhead = ($225,000 × 40%) / $120,000 × $134,400 = $100,800

Fixed overhead = $225,000 × 60% = $135,000

Answer-2:

The following are the relevant considerations involved in MAke or Buy decisions:-

(i) Possible use of released capacity as a reslut of buying instead of making

(ii) Quality of goods supplied byt the supplier.

(iii) Reasonable certainty of the supplier meeting the delivery dates.

(iv) Lead time involved in receiving the materials versus time involved in own production.

(v) Labour relations- any adverse effect on labour relations if it is decided to buy instead of making.

(vi) Possibility of escalations in the price of components purchased

(vii) Availability of transport and other infrastructure facilities for procuring the component from outside.