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
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.

Be sure to use APA formatting in your paper.  Purdue University’s Online Writing LAB (OWL) is a free website that provides excellent information and resources for understanding and using the APA format and style. The OWL website can be accessed here: http://owl.english.purdue.edu/owl/resource/560/01/

This assignment will be assessed using the BUS 5110 Unit 4 Written Assignment rubric

 

Answer 1

Solution:-

	make$	Buy$	Differential$
Direct material	75000		75000
Direct labour	100000		100000
Variable overhead	375000		375000
Fixed overhead	150000	112500	37500
Purchase price		3000000	3000000
Total cost	700000	3112500	-2412500
Unit cost	14.00	62.25	-48.25

Analysis

Engine should be made inside sales cost per unit is lower to make than to buy the financial adventages $ of making engines is $ 2412500

In make vsok bye decision only relevant cost should be analysed for make relevant cost are variable cost and fixed cost for by relevant costs are unavoidable fixed cost and external buying costs

Other factor to consider

Alternative uses of existing facilities-opportunity cost. If there is opportunity cost and if when fields are higher than buying.decision should be bye better negotiation of rates with vendor-lower the buying cost it is better

Answer 2

The company should make engines since the net income has decreased by $487,500. In other words, the cost of buying is more than making the engines.

Workings:

	Make	Buy	Net Income Increase / (Decrease)
Direct Materials [75000*12]	900,000		900,000
Direct Labor [100,000*12]	1,200,000		1,200,000
Variable Overheads [50,000*7.5]	375,000		375,000
Fixed overheads [50,000*2*150%]	150000	112500	37500
Purchase price [50,000*60]		3000000	-3,000,000
Total	2,625,000	3,112,500	-487,500