Scribd
Upload
21 views5 pages

BUS 5110 01 Written Assignment 4

The document analyzes whether a vacuum manufacturer should make or buy an engine component based on costs. It finds that outsourcing the component would be slightly cheaper based on direct costs, variable overhead, and relevant fixed overhead. However, it notes there may be qualitative factors like quality control to also consider in the decision.

Uploaded by

R Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
21 views5 pages

BUS 5110 01 Written Assignment 4

The document analyzes whether a vacuum manufacturer should make or buy an engine component based on costs. It finds that outsourcing the component would be slightly cheaper based on direct costs, variable overhead, and relevant fixed overhead. However, it notes there may be qualitative factors like quality control to also consider in the decision.

Uploaded by

R Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 5

BUSINESS ADMINISTRATION MASTERS

PROGRAM

BUS 5110-01 MANAGERIAL ACCOUNTING

Make or Buy Decision Analysis for a

Vacuum Manufacturer

By

Ricky Singh

12/12/2023

1|Page
Introduction

For manufacturing companies, deciding whether to manufacture or purchase components is

an important strategic issue. This essay examines a vacuum manufacturer's choice of

whether to outsource the production of an engine component or keep making it internally.

After a cost comparison that takes into account both direct and indirect costs, the analysis

will offer a recommendation regarding whether to manufacture or purchase the engines.

Cost Analysis

Direct Costs

Direct Materials: $75,000 per month.

Direct Labor: $100,000 per month.

Total Direct Costs: $175,000 per month.

Variable Factory Overhead

Applied at $7.50 per unit.

Total Variable Overhead (Annual): $7.50/unit x 50,000 units = $375,000.

2|Page
Fixed Factory Overhead

Applied at 150% of direct labor cost per unit.

Monthly Direct Labor Cost Per Unit: $100,000 / 50,000 = $2 per unit.

Fixed Overhead Per Unit: 150% x $2 = $3 per unit.

Total Fixed Overhead (Annual): $3/unit x 50,000 units = $150,000.

Total Annual Manufacturing Cost

Total Direct Costs + Variable Overhead + Fixed Overhead

$175,000×12+$375,000+$150,000=$2,550,000 / 4,275,000

Cost to Buy

Cost per Unit to Buy×Total Units

$60×50,000=$3,000,000

However, 75% of fixed overhead will continue regardless of the decision. Thus, the

relevant portion of the fixed cost is 25%.

Relevant Fixed Overhead

Relevant Fixed Overhead=25%×$150,000=$37,500/ 450,000

3|Page
Revised Total Cost if Outsourced:

Direct Costs -Variable Overhead + Relevant Fixed Overhead

$2,550,000-$150,000+$37,500=$2,437,500

Approach to the Problem

A comparison of the overall costs related to each choice is what determines whether to

make or buy. Direct materials, direct labor, variable overheads, and the percentage of fixed

overheads that can be avoided if outsourcing is selected are the pertinent costs that are the

subject of the analysis.

Other Factors to Consider

Beyond the quantitative analysis, several qualitative factors should be considered:

 Quality Control: In-house production might offer better control over quality

standards.

 Supply Chain Reliability: Dependence on a third-party supplier may introduce risks

related to supply chain disruptions.

 Long-Term Strategic Implications: Outsourcing core components may impact the

company’s long-term strategic capabilities and innovations.

 Relationship with the Supplier: The reliability and reputation of the third-party

supplier are crucial.

These factors either support or challenge the decision to outsource, depending on the

company’s strategic priorities and operational capabilities.

4|Page
Conclusion

Based on the calculations, the annual cost of making the engines in-house is $2,550,000,

while the cost to buy from a third party is effectively $2,437,500 when considering the

relevant fixed costs. Therefore, it would be more cost-effective to outsource the engine

production.

References

Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2020). Managerial Accounting (16th

ed.). McGraw-Hill Education.

Horngren, C. T., Datar, S. M., & Rajan, M. V. (2019). Cost Accounting: A Managerial

Emphasis. Pearson Education.

Walther, L. M. (2013). Financial accounting (2013 edition, 1–1 online resource (415

pages: color illustrations). Principlesofaccounting.com San Bernardino, CA; WorldCat.

https://archive.org/details/financialaccount0000walt

5|Page

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy