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Written Assignment Unit 4

The vacuum manufacturer analyzed the costs of producing versus buying engine components, finding that producing in-house costs $4,275,000 annually compared to $4,350,000 for outsourcing. The analysis suggests a savings of $75,000 per year if the company manufactures the engines itself. However, potential design and construction errors could impact these savings, making careful consideration of production capabilities essential.

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16 views3 pages

Written Assignment Unit 4

The vacuum manufacturer analyzed the costs of producing versus buying engine components, finding that producing in-house costs $4,275,000 annually compared to $4,350,000 for outsourcing. The analysis suggests a savings of $75,000 per year if the company manufactures the engines itself. However, potential design and construction errors could impact these savings, making careful consideration of production capabilities essential.

Uploaded by

vidabisilki
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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WRITTEN ASSIGNMENT UNIT 4

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.


For 50,000 units the calculations are listed below.

Description Cost annually

Direct materials $75,000 per month $75,000 x 12 = $900,000

Direct materials/ unit $18/unit $900,000/50,000= $18

Direct Labor $100,000/month $100,000 x 12= $1,200,000

Total $175,000/month $175,000x12= $2,100,000

Annual production - 50,000 units

Variable factory overhead $7.5 per units $7.5 x50,000= $375,000

Direct Labor per unit $ 24 $1,200,000/50,000= $24

Fixed factory overhead 150% x direct labor per unit 150% x $24 =$36/unit

Total annual fixed factory $36 x 50,000 = $1,800,000/year

overhead

75% of total annual fixed 75% x 1800,000=

factory overhead $1,350,000/year

Should the business purchase the engines: Engine Cost: $60 multiplied by 50,000 is $3,000,000, or $6075

per unit. Total annual fixed manufacturing costs: $1.800.000 multiplied by 75% equals $1.350.000; per

unit: $27. Total annual costs: $4.350.000; each unit: $8

Should the business produce the engines: Direct Labor/ year: $1.200.000 Direct Materials/ year:

$900.000 | per unit: $18 erratic factory Annual overhead: $375,000; each unit: $7.5 Total annual fixed

manufacturing overhead is $1.800.000, with a unit cost of $36. Total annual costs are $4.275.000, with a

unit cost of $85.

This translates to total expenses of $4,275,000, saving the corporation $75,000 compared to total costs of

$4,350,000 if the engine is externalized... Therefore, I would advise the company to produce its own
engines, presuming that the staff is capable of designing and constructing them flawlessly. This is because

any mistakes in the design or construction could raise the cost of manufacturing, which might even

outweigh the difference—which is only $75,000 per year and $1.5 per unit—which is not very significant.

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