Question

Lindsey is a Procurement Manager for School Manufacturing (RM). She is considering a proposal from her supplier Livingston Electronics (LE). LE has proposed to supply an electrical component, SCM-305, that is used by RM for one of its industrial products. Up until now RM has manufactured the component in-house. After hearing about LE’s proposal, RM’s production manager indicated that it might be worth further consideration, so Lindsey decided to perform a cost analysis.

The RM accounting department provided Lindsey with the following unit cost information for the in-house manufacturing of SCM-305:

Direct Labor $ 7.00

Direct Material                                                9.00

Factory O/H Variable 3.00

Factory O/H Fixed                                            4.00

                     Total Unit Cost                         $23.00

The LE proposal is to provide SCM-305 at a unit price of $22.00. If the decision is to buy from LE, the SCM-305 production equipment at RM would become idle.

Which of the following is the correct Continue to Make or Buy analysis and conclusion?

Group of answer choices

Make = $23.00; Buy = $19.00 therefore, buy it

Make = $23.00; Buy = $22.00 therefore, buy it

Make = $20.00; Buy = $22.00 therefore, continue to make it

Make = $19.00; Buy = $22.00 therefore, continue to make it

Answer 1

Based on the information available in the question, we can answer as follows:-

While deciding on Make or Buy decisions, it becomes important to consider the impact of Fixed costs that can be avoidable or not avoidable. Per the observation of the question, we understand that , if the decision is to buy from LE, the SCM-305 production would become Idle. All the variable costs can be avoided but however the Factory Overheads portion which are fixed will continue to be incurred. As such, fixed factory overheads are not relevant to our Make or Buy decisions.

We can prepare the analysis as follows:-

No. of units
Particulars	Make Unit	Buy Unit	Cost to Make minus cost to buy
Direct Materials	9	-	9
Direct Labor	7	-	7
Factory Variable Overhead	3	-	3
Purchase price from outsider		22	(22)
Total Profit	19.00	22	(3)

Based on the above calculation, the correct answer is Option D - Make $19 ; Buy - $22.00, therefore , continue to make it. SInce the cost to Make $19 is lesser than the cost to buy, it is better for the company to Make it.

Option A & B is incorrect as it is not beneficial for the company to buy it based on the above calculations.

Option C is incorrect as the cost to make is mentioned incorrectly.

Please let me know if you have any questions via comments and all the best :) !