6. Perform a make-buy analysis using the following information. A) Your plant is

Question

6. Perform a make-buy analysis using the following information.

A) Your plant is at 75% capacity, tooling exists and all engineering has been done.

Lot Quantity 100; quoted price for 100 is $2.00 each

Direct Labor per lot $89.55
Direct Mat’l $34.92 per lot  
Variable OH $5.72 per lot
Fixed OH $90.00 per lot
Engineering $500.00 (sunk cost)
Tooling $34.70 (sunk costs)

Buy or Make?

B) PLANT AT 100% of capacity ; quoted price for 100 is $2.00 each (same information, the plant is just at 100% capacity)
Lot Quantity 100
Direct Labor per part $89.55 per lot
Direct Mat’l $34.92 per lot
Variable OH $5.72 per lot
Fixed OH $90.00 per lot
Engineering $500.00 (sunk costs - already done)
Tooling $34.70 (sunk costs - already done)
Buy or make?

Explanation / Answer

a. If the plant is at 75% of capacity

Cost to Buy = 100 units * $2 = $200

Cost to make = Direct Labor + Direct Material + Variable OH

Cost to make = $89.55 + $34.92 + $5.72

Cost to make = $130.19

The Fixed OH is a fixed charge and Engineering cost, tooling are sunk cost so the same is ignored while calculating cost to make.

Thus it is advised to Make the product as it is less than cost to buy

b. If the plant is at 100% of capacity

Cost to Buy = 100 units * $2 = $200

Cost to make = Direct Labor + Direct Material + Variable OH + Fixed OH

Cost to make = $89.55 + $34.92 + $5.72 + $90

Cost to make = $220.19

The Fixed OH is a fixed charge but the plant is working at 100% capacity and we are making this lot by forgoing current production thus it is considered and Engineering cost, tooling are sunk cost so the same is ignored while calculating cost to make.

Thus it is advised to buy the product as it is less than cost to Make

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