Make-or-Buy Decision

Make-or-Buy Decision

Problem 6-A1

Solution

Total Units

Per Unit

Total

Make

Buy

Make

Buy

Purchase Price

80000

$ 2.10 $ 168,000

Materials

$ 1.40 $ 112,000

Labor

$ 0.25 $ 20,000

Variable Overhead

$ 0.20 $ 16,000

Fixed Overhead

$ 0.75 $ 60,000

Total

$ 2.60 $ 208,000

Cost saved after buying the Parts

$ 0.50 $ 40,000

The subjective factors that the company will have to consider will include the supplier relations. If the company has good business relations with the supplier then it will have no problem in the procurement of the parts otherwise the company will have to look for more potential and trustworthy suppliers.

Solution

Total Units

Per Unit

Total

Make

Buy

Make

Buy

Purchase Price

80000

$ 2.10 $ 168,000

Materials

$ 1.40 $ 112,000

Labor

$ 0.25 $ 20,000

Variable Overhead

$ 0.20 $ 16,000

Fixed Overhead

$ 1.00 $ 80,000

Total

$ 2.85 $ 228,000

Cost saved after buying the Parts

$ 0.75 $ 60,000

New fixed costs =

$800,000

10 years

=

$80,000

Problem 6-A2

Contribution Margin comparison

Plain Circular Saw

Professional Circular Saw

Selling Price

70

100

Variable Costs

55

75

Contribution Margins

15

25

Contribution margin ratio =

Contribution Margin

Selling Price

Plain Circular Saw

Professional Circular Saw

=

21.43%

=

25%



Machine Hours Available =

20000 Hours

Plain Circular Saw

Professional Circular Saw

Machine Hours per unit

0.5

Hours per unit

1

Hour per unit

Contribution Margin

15

25

Units produced in 20000 Hours

40000

20000

Total Contribution

600000

500000

Therefore on the basis of the above analysis it can be concluded that the company will have to produce the plain circular saw utilizing the total machine hours available to make the most efficient use of the machine hours available because the plain circular saws have the highest contribution margin for the total machine hours available.

The major lesson that is learnt from this problem is that the companies have to consider their contribution margins when taking decisions regarding the allocation of the limiting factors or resources.

Problem 6-A3

Products

A

B

C

Sales

$ 230,000 $ 330,000 $ 175,000

Less:

Additional Costs

$ 190,000 $ 300,000 $ 100,000

Net Gain

$ 40,000 ...