Question

Lakeview Engine, Inc., produces engines for the watercraft industry. An outside manufacturer has offered to supply several component parts used in the engine assemblies, which are currently being produced by Lakeview. The supplier will charge Lakeview $290 per engine for the set of parts. Lakeview’s current costs for those part sets are direct materials, $165; direct labor, $75; and manufacturing overhead applied at 100% of direct labor. Variable manufacturing overhead is considered to be 20% of the total, and fixed overhead will not change if the part sets are acquired from the outside supplier.

Required:

a. What would be the net cost advantage or disadvantage if Lakeview decided to purchase the parts?

Answer 1

Particulars	Current Production Costs	Avoidable Cost If Purchased	Cost To Buy
Manufacturing Costs
Direct Material	$                                       165.00	$                                                165.00
Direct Labour	$                                          75.00	$                                                  75.00
Variable Overhead (75*20%)	$                                          15.00	$                                                  15.00
Fixed Overheads(75*80%)	$                                          60.00	$                                                         -
Total Cost Per Unit	$                                       315.00	$                                                255.00
Purchase Costs
engine assembly part sets			$          290.00
Disdvantage if Lakeview decided to purchase the parts		$                                                  35.00