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 $72 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   $45.00
Direct labor   18.00
Variable overhead   4.00
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—$1,150 each (The setups would be avoided, and total spending could be reduced by $1,150 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 $12,320 and could be totally avoided if the part were purchased.

Engineering work: 450 hours, $45/hour. (Although the work decreases by 450 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.

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

It is $fill in the blank 2


expensive to buy outside.
3. Which of the listed items is not a qualitative factor that would affect the decision?

4. After reviewing the special study, the controller made the following remark: "This study ignores the additional activity demands that purchasing would cause. For example, although the demand for inspecting the part on the production floor decreases, we may need to inspect the incoming parts in the receiving area. Will we actually save any inspection costs?" Is the controller right?

Answer 1

Answer:

1)

Recognize the decision to make or purchase a company: Examples of decision-making are as follows:
1. Make a decision or buy it
2. Allow or refuse a particular request
3. Hold or remove all of the segments.
The use of resource activity and the definition of significance are useful resources for decision-making.
Production cost per unit under traditional cost = $107 per unit.
The company received an offer that the seller would like to sell a track assembly for $72 each.
Companies undertaking assembly acts shall render pieces internally. But these pieces may also be subcontracted. The costs incurred throughout the internal preparation of the product should be balanced with the costs incurred in the selling of the product.
B, Inc. manufactures a track system independently for its Golf carts. The variable expense involved in the manufacture of the commodity is as follows:

Details	Amount
Direct material	$45
Direct labor	$18
Variable overhead	$4
Total variable cost:	$67

Contribution margin:
Contribution margin per unit = Selling price - Variable cost
= $72 -$67
= $5

Total contribution margin = 2600 tracks * $5
= $13,000

The price offered is $72 per unit. Since the price offered is higher, the company should not accept the offer.

2)

Identify the decision after a special study:

The CEO of the group claimed that by accepting the above-mentioned plan, the company will save the following fixed costs.

Costs recovered are as follows:

The organization will save three systems, per setup cost is $1,150.
Max cost-saving setup = $1,150 * 3
= $3,450.00

Cost-saving inspection = $12,320

The organisation will reduce the cost of 75 content movements by $30 each.

Total saving = $3,450 + $12,320 + $2,250
= $18,020

Because the cost saved is greater than the additional cost added, the plan should be approved.

3)

Qualitative factors that have an impact on the decision to make or purchase a situation are:

1. Variable costs incurred in the manufacture of a good.
2. Set up prices for the manufacture of the commodity.
3. Salary paid only for workers working in that section.
4. All right. 4. The material is going towards the commodity.

4)

Identify the saving in inspection cost:

Identify savings in inspection costs:
• The controller is right in its analysis to the extent that the material or part obtained must still be inspected for injury, quality control procedures, etc. The additional inspector who has been dismissed earlier will be re-appointed in order to inspect the receiving area.
• Unless the inspector has been re-appointed, the decision could go wrong. Therefore, care must be taken of the controller.

This analysis lacks the extra operation demands that the transaction may have caused. For eg, although the need for inspection of the component on the manufacturing floor reduces, we may need to inspect the incoming parts in the receiving area. Are we really going to save some inspection costs? Ok, if the extra cost needed for the inspection of the receiving material is more than $5,030, then the controller is right, otherwise the company can opt for the buying alternative. Because the inspection cost of the receiving material is not given, we can not determine if the controller is correct or incorrect.