(TCO D) McMullen Co. manufactures automatic door openers. The company uses 15,00
ID: 2345967 • Letter: #
Question
(TCO D) McMullen Co. manufactures automatic door openers. The company uses 15,000 electronic hinges per year as a component in the assembly of the openers. You have been engaged by McMullen to assist with an evaluation of whether the company should continue producing the hinges or purchase them from an outside vendor.The Accounting Department provided the following detail regarding the annual cost to produce electronic hinges:
Direct materials $54,000
Direct labor 60,000
Variable manufacturing overhead 36,000
Fixed manufacturing overhead 90,000
Total costs $240,000
The Procurement Department provided the following supplier pricing: Supplier A price per hinge $11.00
Supplier B price per hinge $10.75
Supplier C price per hinge $10.50
The supplier pricing was obtained in response to a formal request for proposal (RFP). Procurement has determined these suppliers meet McMullen's technical specifications and quality requirements.
If McMullen stops producing the part internally, 10% of the manufacturing overhead would be eliminated.
Required: Prepare a make-or-buy analysis showing the annual advantage or disadvantage of accepting an outside supplier's offer
Explanation / Answer
make
buy - A
buy - B
buy - C
Direct material
54000
0
0
0
Direct labor
60000
0
0
0
Variable MOH
36000
0
0
0
Fixed MOH
90000
81000
81000
81000
Price to buy
0
165000
161250
157500
total cost
240000
246000
242250
238500
The lowest cost would be buying from C.
make
buy - C
net income increase(decrease)
Direct material
54000
0
54000
Direct labor
60000
0
60000
Variable MOH
36000
0
36000
Fixed MOH
90000
81000
9000
Price to buy
0
157500
-157500
total
240000
238500
1500
Buying from C would increase net income by $1500 annually compared to making.
make
buy - A
buy - B
buy - C
Direct material
54000
0
0
0
Direct labor
60000
0
0
0
Variable MOH
36000
0
0
0
Fixed MOH
90000
81000
81000
81000
Price to buy
0
165000
161250
157500
total cost
240000
246000
242250
238500
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