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Unformatted text preview: hain internally, rather than to buy externally from a
supplier is called a “make or buy” decision.
advantages Smoother flow
of parts and
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
Depreciation of special equip.
General factory overhead
Unit product cost
Managerial Accounting $ 9
$ 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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