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Lakeview Engine, Inc., produces engines for the watercraft industry. An outside manufacturer has offered to supply...

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 $320 per engine for the set of parts. Lakeview’s current costs for those part sets are direct materials, $160; 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.

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

Solutions

Expert Solution

Solution:

Cost of purchasing = $320

Direct materials = $160

Direct labor = $75

Cost of producing = $160 + $75 + (20%*75)

= $235 + $15

= $250

Net cost disadvantage = $320 - $250

= $70

If Lakeview decided to purchase the parts, they will incur a loss of $70 per unit

Total manufacturing cost consist 80% Fixed and 20% variable.

All the parts are acquired from the outside supplier, fixed cost will not incur.

ekkarill92 answered 2 years ago
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