13.59 - be incurred even if the pumps are purchased. Xyon...

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13.59 (20 min) Make or buy: Xyon Co. Cost if make Cost if buy Quantity required per month 10,000 Components $ 270,000 Assembly labor 290,000 Facility costs per month 640,000 640,000 Total production cost 1,200,000 Alternative use of the facility (opportunity cost) 150,000 Purchase cost $ 88 Make or buy analysis Make Buy Differenc e Purchase cost per month $ 880,000 $ (880,000 ) Internal cost per month Components $270,000 - 270,00 0 Assembly labor 290,000 - 290,00 0 Facility costs (irrelevant) 640,000 640,000 - Alternative use of the facility (opportunity cost) 150,000 150,00 0 Total cost $ 1,350,000 $ 1,520,000 $ (170,000 ) a. The revised analysis shows that Xyon is not financially better off buying the pumps. The company’s original analysis erroneously did not include the monthly facility cost for both alternatives, which appears to be a committed cost that will
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Unformatted text preview: be incurred even if the pumps are purchased. Xyon has an alternative use for the facility. Although it does not change the outcome of the analysis, the opportunity cost should be counted as a cost of making or a benefit of buying the pumps. b. Benefits of outsourcing the pumps to Kobec include the reliability and expertise of the supplier. Xyon admits that it has little experience with the products it currently buys from Kobec, and its inexperience might cost the company more than the $170,000 extra per month it spends. In other words, Xyons costs of making the pumps might be understated. Problems of outsourcing include possible adverse impacts if Kobec does not meet its obligations of quality and timeliness....
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13.59 - be incurred even if the pumps are purchased. Xyon...

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