Question

Make-or-Buy, Traditional and ABC Analysis

Brees, Inc., a manufacturer of golf carts, has just received an offer from a supplier to provide 2,600 units of a component used in its main product. The component is a track assembly that is currently produced internally. The supplier has offered to sell the track assembly for $66 per unit. Brees is currently using a traditional, unit-based costing system that assigns overhead to jobs on the basis of direct labor hours. The estimated traditional full cost of producing the track assembly is as follows:

Direct materials	$40.00
Direct labor	16.50
Variable overhead	4.50
Fixed overhead	40.00

Prior to making a decision, the company’s CEO commissioned a special study to see whether there would be any decrease in the fixed overhead costs. The results of the study revealed the following:

3 setups—$1,160 each (The setups would be avoided, and total spending could be reduced by $1,160 per setup.)

One half-time inspector is needed. The company already uses part-time inspectors hired through a temporary employment agency. The yearly cost of the part-time inspectors for the track assembly operation is $12,300 and could be totally avoided if the part were purchased.

Engineering work: 470 hours, $45/hour. (Although the work decreases by 470 hours, the engineer assigned to the track assembly line also spends time on other products, and there would be no reduction in his salary.)

75 fewer material moves at $30 per move.

Required:

1. Ignore the special study, and determine whether the track assembly should be produced internally or purchased from the supplier.
Produced internally

2. Now, using the special study data, repeat the analysis.

It is $ ?   less expensive to buy outside.

Answer 1

1. The relevant costs of making the part are Direct material+Direct Labour+Variable overhead and the relevant cost of buying the part is the purchase price .

So Total Cost to company (In Buy Option) = 2600 units @ $66 per units = $ 171,600

And total cost to company (In Make option)= Direct Material+Direct Labour+Variable Overhead

= (2600*40)+(2600*16.5)+(2600*4.5)

= 104,000+42,900+11,700

= $ 158,600

So, since the make option is cheaper the track assembly should be produced internally.

2. As per analysis following are the costs specially required to manufacturethe the product in house ,

Set up cost = $ 3,480( 3 set up @ 1160 per set up)

Part time inspector cost= $ 12,300

Material Moves = $ 2,250( 70 moves @ $ 30 per moves )

So total cost (in make option) = Direct material +Direct Labour+Variable overhead+Part time inspector cost +Set up cost+Material Moving cost

= 104,000+42,900+11,700+12,300+3,480+2,250

=$ 176,630

By adding this avoidable costs the make option is costiler by $ 5,030. So the company should go for BUY option instead of ,manufacturing inside.

Engineering work is the item which is not a qualitative factor that would affect the decision as because its unavoidable eventhough we buy teh product from outside.