Question

Oxford Engineering manufactures small engines. The engines are sold to manufacturers who install them in such products as lawn mowers. The company currently manufactures all the parts used in these engines but is considering a proposal from an external supplier to supply the starter assembly used in these engines.

The starter assembly is currently manufactured in Division 3 of Oxford Engineering. Last year, Division 3 manufactured 156,000 starter assemblies, but over the next several years, it is expected that 187,000 assemblies will be needed each year. Total costs related to the starter assembly for last year were as follows:

Direct material	$290,160
Direct labor	$184,080
Total overhead	$624,000
Total	$1,098,240

Further analysis of overhead revealed the following information:

55% of total overhead was fixed.

$117,000 of the fixed overhead were allocated costs that will continue even if the production of the starter assembly is discontinued.

Tidnish Electronics, a reliable supplier, has offered to supply starter assembly units at $5.00 per unit. If the company buys the assembly from Tidnish, sales of another product can be increased, resulting in additional contribution margin of $42,000.

REQUIRED

1. By how much will Oxford Engineering's total profits change if they decide to buy the starter assembly from Tidnish Electronics instead of making it themselves?   (Note: if the buy costs are less than the make costs, enter the difference as a positive number; if the make costs are less than the buy costs, enter the difference as a negative number.)

Answer 1

Initial Savings in Cost - Buy	194,680.00
additional contribution margin	42,000.00
Total Profit will Increase by	236,680.00

	Make
Direct Material	290,160.00
Direct labor	184,080.00
Variable Overhead(624000*45%)	280,800.00
Total Variable Cost	755,040.00
Number of Units	156,000.00
Variable Cost per Unit	4.84

Variable Cost to Manufacture (197000 *4.84)	953,480.00
Fixed Overhead(624000*55%)	343,200.00
Total Cost to Make	1,296,680.00

Cost of Purchase(197000*5)	985,000.00
Fixed Cost to Continue	117,000.00
Relevant cost of Buy	1,102,000.00

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