Question

I need help with part A

A company is planning to introduce a new laptop computer to its existing product line. Management must decide whether to make the computer case or buy it from an outside supplier. The lowest outside price is $100. If the case is produced internally, the company will have to purchase new equipment that will yield annual depreciation of $120,000. The company will also need to rent a new production facility at $180,000 a year. At 20,000 cases per year, a preliminary analysis of production costs shows the following: Per case Direct materials Direct labor Variable overhead Equipment depreciation (existing) Building rental (existing) Allocated fixed overhead Total cost 42.00 36.00 9.00 7.50 11.00 9.00 $114.50 0 3 24 25 26 27 28 29 30 31 32 REQUIRED: A. Determine the incremental costs that the company would incur if it produces 20,000 computer cases and the amount that would be either be saved or incurred as additional cost by making rather than buying the cases. B. Based on your work in Part A, state whether the company should produce or purchase the computer cases 34 35 36 37 38 39 40 Use the partial template to the right for your answer.

Answer 1

Part A

Incremental costs to make cases
Variable costs :
Direct materials (20000*42)	840000
Direct labor (20000*36)	720000
Variable overhead (20000*9)	180000
Total variable costs	1740000
Plus additional Fixed costs :
Depreciation	120000
Rent	180000
Total incremental costs to make	2040000
Total cost to buy (20000*100)	2000000
Amount saved (or excess costs) if the cases are produced rather than purchased (2000000-2040000)	(40000)

Part B

Company should purchase the cases instead of producing because cost of producing cases is $40000 higher than cost of purchasing. Purchasing is cheaper option.