Question

7. Make-or-buy decision. Standard costs and other data for two component parts used by Griffon Electronics are presented below: PART A4 PART B5 8.00 4.70 2.00 $14.70 1.00 4.00 Factory overhead. 8,000 2 $15 Machine hours per unit. Unit cost if purchased. $5 In past years, Griffon Electronics has manufactured all of its required components; however, in the current year only 30,000 hours of otherwise idle machine time can be devoted to component production. Accordingly, some of the parts must be purchased from outside suppliers. in produc- ing parts, factory overhead is applied at $1 per standard machine hour. The fixed capacity cost, which will not be affected by any make-or-buy decision, represents 60% of the applied factory overhead. Required: (1) The relevant unit production costs to be considered in the make-or-buy decision to sched- ule machine time (2) The units of A4 and B5 that Griffon should produce if the allocation of machine time is (AICPA adapted) based on potential cost savings per machine hour.

Answer 1

1	Calculation of unit production costs to be considered
		A4	B5
	Direct materials	0.4	8
	Direct labor	1	4.7
	Variable factory overhad	1.6	0.8
	Relevant unit production costs	3	13.5
2		A4	B5
	Costs of purchase	5	15
	Less: Relevant cost of making	3	13.5
	Costs saving per unit	2	1.5
	Machine hour required per unit	4	2
	Cost savings per unit per achine hour	0.5	0.75
	Rank of producing	2	1
	Units produced	3500	8000	(8000*2) =16000 hrs used
		(30000-16000)/4