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Make-or-Buy, Traditional Analysis Morrill Company produces two different types of gauges: a density gauge and a thickness gaupurchased. All units produced are sold, and there are no ending inventories of subassemblies. Morrill is considering making tEnter the relevant costs of each alternative. Lease and Make Buy Drop Thickness Gauge and Make Total relevant costs $ $ 2. Su

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Answer #1
1 Lease and make Buy Drop thickness guage and make
Lease cost $36,720
Supervision cost $13,600
Manufacturing cost: (2720 sub assemblies)
Direct materials (2720*2) $5,440 $5,440
Direct labor (2720*3) $8,160 $8,160
Variable overhead (2720*2) $5,440 $5,440
Contribution margin lost on Thickness guage $46,240
Purchase price of sub assemblies (2720*25) $68,000
Total relevant cost $69,360 $68,000 $65,280
Note:Direct fixed expenses in thickness guage will be unaffected and hence,irrelevant to the decision
Decision:
Make the subassembly
Drop the thickness gauge
2 Lease and make Buy Drop thickness guage and make
Lease cost $36,720
Supervision cost $13,600
Manufacturing cost: (2720 sub assemblies)
Direct materials (2720*2) $5,440 $5,440
Direct labor (2720*3) $8,160 $8,160
Variable overhead (2720*2) $5,440 $5440
Contribution margin lost on Thickness guage $46,240
Contribution margin lost on density guage $9,520
(95,200*10%)
Purchase price of sub assemblies (2720*25) $68,000
Total relevant cost $69,360 $68,000 $74,800
Note:Direct fixed expenses in thickness guage will be unaffected and hence,irrelevant to the decision
Decision:
Keep the thickness guage and buy the subassembly
3 Lease and make Buy Drop thickness guage and make
Lease cost $36,720
Supervision cost $13,600
Manufacturing cost: (3808sub assemblies)
Direct materials (3808*2) $7,604 $7,604--
Direct labor (3808*3) $11,424 $11,424
Variable overhead (3808*2) $7,604 $7,604
Contribution margin lost on Thickness guage $46,240
Contribution margin lost on density guage $9,520
(95,200*10%)
Purchase price of sub assemblies (3808*25) $95,200
Total relevant cost 76,952 95,200 82,392
Note:Direct fixed expenses in thickness guage will be unaffected and hence,irrelevant to the decision
Decision:
Make the subassembly
Lease the needed space and equipment
(Select the alternative with least total relevant cost)
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