Question

Please describe the circumstances of the following case study and recommend a course of action. Explain your approach to the problem, perform relevant calculations and analysis, and formulate a recommendation. Ensure your work and recommendation are thoroughly supported. Case Study: A vacuum manufacturer has prepared the following cost data for manufacturing one of its engine components based on the annual production of 50,000 units. Description Cost per Month: Direct Materials = $75,000, Direct Labor = $100,000 and, Total = $175,000. In addition, variable factory overhead is applied at $7.50 per unit. Fixed factory overhead is applied at 150% of direct labor cost per unit. The vacuums sell for $150 each. A third party has offered to make the engines for $60 per unit. 75% of fixed factory overhead, which represents executive salaries, rent, depreciation, and taxes, continue regardless of the decision. Should the company make or buy the engines? Superior papers will: Perform all calculations correctly. Articulate the approach to solving the problem, including which financial information is relevant and not relevant. Correctly conclude on whether the company should make or buy the engines. Propose other factors that should be considered when making this decision and elaborate on whether or not those factors do or do not support the decision.

Answer 1

(0 Solution No. of units = 1 Cost Per Month. Direct material $750.00 Direct labor & lowew Variable f.0.4 fixed factory on (woy a direct labor Cost pu (24 x 150% To feel P. Unit Cost 80000 annual I Annual Cost Cost per Unit (6)=(X12) 02 67 soon 900000 | $ 18 I (2avar $ 724 $ 7.50 (given 85.5

Make or buy decision Since 75% of fixed fecutor OH will be incurred lissespective of the fact that the engines are made for purchased from third party, therefore, for comparing the costs for decision making, 75t. of fixed factory o Heads shall not be taken in to account. A Cost of making the Product / Engine Per Unit Direct Materials $ 18 Drect labor on $ 24 Variable feutory on tus $ 7.50 fixed falsory 0.4 to $ 9 [25% of 367 1 Cost of making the unit $ 585 & Cost of buying the unit frou Meabet is $60 from above calculations, we can conclude that the company should make the engine, as the Cost of making is less than berging it hom nearter.

-) In addition to the cost analysis for make or buy decision, one should also considen the other non-cost factors such as Production capacity Volume of production if the volume of production is leigh, then it is preferate to make, however, if the production volume is low, then the product should be bought Production Capacity. If the manufactuer has created large production capacity, then It should make rather to buy Availability of man power? If the skilled and efficient maupower is available, then the swders should made otherwise, purchased. Pertent: If the product is pecsented then also it should be made in osgnist ationis own brand name. Cluality & reliasility & vendoss! To mautant the quality and relicestity in vendors, the produs should be madle not prehlesed