A decision to carry out one of the activities in the

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Unformatted text preview: hain internally, rather than to buy externally from a supplier is called a “make or buy” decision. vertical integration advantages Smoother flow of parts and materials Better quality control Realize profits Managerial Accounting vertical integration disadvantages Companies may fail to take advantage of suppliers who can create economies of scale advantage by pooling demand from numerous companies. 12-17 The Make or Buy Decision: An Example Essex Company manufactures part 4A that is used in one of its products. The unit product cost of this part is: Direct materials Direct labour Variable overhead Depreciation of special equip. Supervisor's salary General factory overhead Unit product cost Managerial Accounting $ 9 5 1 3 2 10 $ 30 12-18 The Make or Buy Decision The special equipment used to manufacture part 4A has no resale value. The total amount of general factory overhead, which is allocated on the basis of direct labour hours, would be unaffected by this decision. The $30 unit product cost is based on 20,000 parts produced each year...
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