F Question 3: Make versus buy
You make refrigerators. Currently, you manufacture compressors for
your refrigerators in-house. An outside supplier has offered to
sell you equivalent compressors at a wholesale price of $85 per
unit. You need 1,000 compressors per month. The internal production
costs per compressor are as follows:
cost per unit | |
direct materials | $30 |
direct labor | $30 |
variable overhead | $20 |
fixed overhead | $10 |
total | $90 |
If you outsource the production of compressors (the buy
option) in the short term, how will this choice affect your costs
and profit?
First, compute variable costs under MAKE versus BUY:
MAKE | BUY | |
unit VC | ||
total VC |
If you outsource (BUY), the incremental revenue, costs, and profit
are:
how much each amount changes if you outsource | |
Incremental revenue | |
Incremental VC | |
Incremental CM | |
Incremental FC | |
Incremental profit |
Enter negative amounts with a minus sign, i.e., -1,000 not
($1,000).
Should you outsource?
NO - outsourcing reduces profit by $5,000
YES - outsourcing reduces costs by $5,000
F Question 3: Make versus buy You make refrigerators. Currently, you manufacture compressors for your refrigerators...
Question 3: Make versus buy You make refrigerators. Currently, you manufacture compressors for your refrigerators in-house. An outside supplier has offered to sell you equivalent compressors at a wholesale price of $75 per unit. You need 1,000 compressors per month. The internal production costs per compressor are as follows: cost per unit direct materials $20 direct labor $30 variable overhead $20 fixed overhead $20 total $90 If you outsource the production of compressors (the buy option) in the short term,...
Question 3: Make versus buy You make refrigerators. Currently, you manufacture compressors for your refrigerators in-house. An outside supplier has offered to sell you equivalent compressors at a wholesale price of $95 per unit. You need 1,000 compressors per month. The internal production costs per compressor are as follows: cost per unit direct materials $40 direct labor $40 variable overhead $10 fixed overhead $30 total $120 If you outsource the production of compressors (the buy option) in the short term,...
You make refrigerators. Currently, you manufacture compressors for your refrigerators in-house. An outside supplier has offered to sell you equivalent compressors at a wholesale price of $85 per unit. You need 1,000 compressors per month. The internal production costs per compressor are as follows: cost per unit direct materials $30 direct labor $30 variable overhead $20 fixed overhead $20 total $100 If you outsource the production of compressors (the buy option) in the short term, how will this choice affect...
Question 3: Make versus buy You make refrigerators. Currently, you manufacture compressors for your refrigerators in-house. An outside supplier has offered to sell you equivalent compressors at a wholesale price of $65 per unit. You need 1,000 compressors per month. The internal production costs per compressor are as follows: cost per unit direct materials $20 direct labor $20 variable overhead $20 total If you outsource the production of compressors (the buy option) in the short term, how will this choice...
MAKE – OR – BUY (OUTSOURCING) DiGabriele Co. is currently producing 20,000 components at a cost of $16 per unit. At this level of production, total fixed overhead costs are $100,000. An outside supplier has offered to sell 20,000 units to DiGabriele for $14 a unit. The normal production per-unit costs are shown below: Per Unit Direct materials $ 2 Direct Labor 4 Variable overhead 5 Fixed overhead 5 $ 16 REQUIRED:...
Outsourcing (Make-or-Buy) Decision Mountain Air Limited manufactures a line of room air purifiers. Management is currently evaluating the possible production of an air purifier for automobiles. Based on an annual volume of 10,000 units, the predicted cost per unit of an auto air purifier follows. Direct materials $8.00 Direct labor 1.50 Factory overhead 5.00 Total $14.50 These cost predictions include $40,000 in facility-level fixed factory overhead averaged over 10,000 units. One of the component parts of the auto air purifier...
Outsourcing (Make-or-Buy) Decision Mountain Air Limited manufactures a line of room air purifiers. Management is currently evaluating the possible production of an air purifier for automobiles. Based on an annual volume of 10,000 units, the predicted cost per unit of an auto air purifier follows. Direct materials $ 9.00 Direct labor 1.40 Factory overhead 10.00 Total $ 20.40 These cost predictions include $80,000 in fixed factory overhead averaged over 10,000 units. The completed air purifier units include a battery-operated electric...
Question 7 Maplewood Company must decide whether to make or buy some of its components. The costs of producing 61,000 switches for its generators are as follows. Direct materials Direct labour $30,500 42,090 Variable overhead Fixed overhead $57,950 60,390 Instead of making the switches at an average cost of $3.13 $190,930 = 61,000), the company has an opportunity to buy the switches at $2.93 per unit. If the company purchases the switches, all the variable costs and one-third of the...
Outsourcing (Make-or-Buy) Decision Mountain Air Limited manufactures a line of room air purifiers. Management is currently evaluating the possible production of an air purifier for automobiles. Based on an annual volume of 10,000 units, the predicted cost per unit of an auto air purifier follows. Direct materials $8.00 Direct labor 1.50 Factory overhead 7.00 Total $16.50 These cost predictions include $40,000 in facility-level fixed factory overhead averaged over 10,000 units. One of the component parts of the auto air purifier...
Devon Firm is considering whether to outsource the manufacture of subcomponent XYZ. The accounting department provides the following cost information for manufacturing 10,000 units of the subcomponent XYZ per month. Direct Material Costs $42,000 Direct Labour Costs $32,500 Variable Overhead $14,000 Fixed Overhead* $12,500 *Fixed overhead includes $5,000 Supervisor’s salary. Stadia Firm agrees to supply Devon with 10,100 units per month for a total cost of $122,500. If the subcomponent XYZ is outsourced, Devon will be able to increase the...