Question

Description The McGee Company makes a complicated batting machine. Currently they produce their own ignition switches. Production manager Jimmy Edmonds has suggested they buy the switches rather than producing them in-house. CFO Jackie Buck is told by Jimmy that they can buy the switches for $8 per switch from the Cub Company. Further, Jimmy tells her that this is a great deal because it costs them $9 a switch* to make them in-house and provides Ms. Buck with the information below. Direct Materials Direct Labor Variable Manufacturing Costs Fixed Manufacturing Costs (Allocated) $50,000 $75,000 $40,000 $60,000 $225,000 25,000 Switches Manufactured Annually *Management is thinking: Cost Per Switch to make: $9.00 per switch ($225.000/25.000) Ms. Buck comes to you, the financial analyst, and ask for your analysis of the information. What is your recommendation assuming all variable manufacturing costs will be eliminated and fixed manufacturing costs for the company are fixed? In your analysis, refer to one of the decision making models presented in the material and analyze the decision - step by step. Write your answer in an Excel document and submit.

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and calculation. For detailed answer refer to the supporting sheet.

H Answer In order to decide whether to purchase the switches or manufacture/ make in house we have to carry out the following analysis:- Statement to calculate the relevant cost to manufacture Per switch Particular Amount Direct Material 50000 Direct Labour 75000 Variable Manufacturing overheads 40000 Total relevat cost 165000 Number of units to be produced 25000 2 Per unit cost 6.6 4 Note 5 Fixed manufacturing cost has been considered sunk cost, as it will not change and remain same irrespective of manufacture or purchase - Since the manufacturing / making cost per unit is less than purchase of $8, so it is better to make/ manufacture the switch Thus the decision is to manufacture / make the switches