Sell maximize profits with limited resources the make

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Resources The Make vs. Buy Decision Essex Company manufactures part 4A that is used in one of its products. Unit product costs, based on 20,000 parts produced per year, as shown: Direct materials Direct labor Variable overhead Depreciation of special equip. Supervisor's salary General factory overhead Unit product cost $9 5 1 3 2 10 $ 30 The special equipment used to manufacture part 4A has no resale value. An outside supplier has offered to provide the 20,000 parts at a cost of $25 per part. The Make vs. Buy Decision Cost Per Unit Outside purchase price $ 25 Cost of 20,000 Units Buy Make $ 500,000 Direct materials (20,000 units) $ 9vs. $500k to buy 180,000 $340,000 to make Direct labor 5 100,000 Variable overhead 1 20,000 Depreciation of equip. as it is cheaper option 3 - Irrelevant: Sunk Cost MAKE, Supervisor's salary 2 40,000 General factory overhead 10 Irrelevant Total cost $ 30 $ 340,000 $ 500,000 The avoidable costs associated with making part 4A include direct materials, direct labor, variable overhead, and the supervisor’s salary. The Make vs. Buy Decision – other considerations Quality Demand pool with business partners : economies of scale from suppliers, hence lower cost Branding Bargaining position Reliability Long term viability Internal flow of parts and materials Adding/Dropping Segments Due to the declining popularity of digital watches, Lovell Company’s digital watch line has not reported a profit for several years. Its manufacturing equipment also has no alternative use. Shou...
View Full Document

Ask a homework question - tutors are online