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?

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.

Answer 1

Answer is given below