Session 15 Solutions

Session 15 Solutions - 2 Make or Buy Example Problem 11-36...

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2) Make or Buy Example: Problem 11-36 Ace Bicycle Company produces bicycles and manufactures all of the parts internally. Ace has received an offer from an outside vendor to supply all of the chains Ace requires at $8.20 per chain. Ace’s expected production for the year is 10,000 units. From the budget, Ace's accountant obtained the following cost information relating to chain production : $75,000 2,000 3,000 30,000 $110,000 $7.50 per unit Variable Unit Costs Inspection, Setup, Materials Handling Machine Rent Allocated Fixed Costs Total Costs The following additional information is available: a) Inspection, Setup and Materials Handling costs vary with the number of batches in which the chains are produced. Ace expects to produce chains in batches of 1,000 units each. b) The Machine Rent costs are payments Ace makes to rent the equipment used to make chains. If Ace buys its chains from the outside vendor, it will not need this machine.
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a) Assume that, if Ace purchases the chains from an outside supplier, the facility where the chains are currently made will remain idle. Should Ace take the supplier's offer? What factors should Ace consider to make the decision? So, should Ace make or buy? Make! 82,000 80,000 3,000 Machine rent 2,000 Inspection, set-up, etc 82,000 Paid to supplier 75,000 Variable cost Buy Vs Make Relevant costs to:
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Are there other qualitative factors that Ace should consider before making the decision? 1) The quality of the chains
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Session 15 Solutions - 2 Make or Buy Example Problem 11-36...

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