Make or Buy
Casting Technology Resources (CTR) has purchased 10,000 pumps annually from Kobec, Inc. Because the price keeps increasing and reached $68.00 per unit last year, CTR’s management has asked for an estimate of the cost of manufacturing the pump in CTR’s facilities. CTR makes stampings and castings and has little experience with products requiring assembly.
The engineering, manufacturing, and accounting departments have prepared a report for management that includes the following estimate for an assembly run of 10,000 pumps. Additional production employees would be hired to manufacture the pumps but no additional equipment, space, or supervision would he needed.
The report states that total costs for 10,000 units are estimated at $957,000, or $95.70 per unit. The current purchase price is $68.00 per unit. so the report recommends continued purchase of the product.
Components outside purchase | $120,000 |
Assembly labor* | 300,000 |
Manufacturing overhead† | 450,000 |
General and administrative overhead† | 87,000 |
Total costs | $957,000 |
*Assembly labor consists of hourly production workers
†Manufacturing overhead is applied to products on a direct-labor-dollar basis. Variable-overhead costs vary closely with direct-labor dollars.
Fixed overhead | 50% of direct-labor dollars |
Variable overhead | 100%of direct-labor dollars |
Manufacturing-overhead rate | 150% of direct-labor dollars |
‡ General and administrative overhead is applied at 10 percent of the total cost of material (or components). assembly labor, and manufacturing overhead.
Required: Was the analysis prepared by Casting Technology Resources’ engineering, manufacturing, and accounting departments and their recommendation to continue purchasing the pumps correct? Explain your answer and include any supporting calculations you consider necessary.
We need at least 10 more requests to produce the solution.
0 / 10 have requested this problem solution
The more requests, the faster the answer.