Question

Southwestern Company needs 1,000 motors in its manufacture of automobiles. It can buy the motors from Jinx Motors for $1,250 each. Southwestern's plant can manufacture the motors for the following costs per unit:

Direct materials	$ 500
Direct manufacturing labor	250
Variable manufacturing overhead	200
Fixed manufacturing overhead	350
Total	$1,300

If Southwestern buys the motors from Jinx, 70% of the fixed manufacturing overhead will not be avoided.

Should the company make or buy the motors?

a) buy and save $50,000

b) make and save $55,000

c) make and save $195,000

d) buy and save $105,000

Washington Industries manufactures electronic testing equipment. Washington also installs the equipment at customers’ sites and ensures that it functions smoothly. Additional information on the manufacturing and installation departments is as follows (capacities are expressed in terms of the number of units of electronic testing equipment):

	Equipment manufactured	Equipment installed
Annual capacity	285 units per year	250 units per year
Equipment actually made and installed	250 units per year	250 units per year

Washington manufactures only 250 units per year because the installation department has only enough capacity to install 250 units. The equipment sells for $55,000 per unit (installed) and has direct material costs of $30,000. All costs other than direct material costs are fixed. The following proposals refer only to the preceding data.

Washington's managers have received recommendations and will choose one. There is no connection between recommendations; only one will be implemented.

I. Washington’s engineers have found a way to reduce equipment manufacturing time. The new method would cost an additional $500 per unit and would allow Washington to manufacture 30 additional units a year. (Do appropriate calculations with reference to change in operating income before answering.)

II. Washington’s designers have proposed a change in direct materials that would increase direct material costs by $2,000 per unit. This change would enable Washington to install 285 units of equipment each year. If Washington makes the change, it will implement the new design on all equipment sold.  (Do appropriate calculations with reference to change in operating income before answering.)

III. A new installation technique has been developed that will enable Washington’s engineers to install seven (7) additional units of equipment a year. The new method will increase installation costs by $145,000 each year. (Do appropriate calculations with reference to change in operating income before answering.)

Which of the following should management conclude?

a) implement I and Washington will increase its manufacturing capacity; if installation improves Washington will be ready

b) wait for a new plan to emerge, there are too many down-sides with I, II, and III

c) Implement III and Washington will increase profit in first year by $30,000 and avoid having permanently raised variable costs

d) implement II and Washington will increase profit by $305,000, and even without investment in fixed cost

Answer 1