Suppose a BMW executive in Germany is trying to decide whether the company shoul

Question

Suppose a BMW executive in Germany is trying to decide whether the company should continue to manufacture an engine component or purchase it from Frankfurt Corporation for $50 each. Demand for the coming year is expected to be the same as for the current year, 200,000 units. Data for the current year follow: Direct Material $5,000,000 Direct Labor 1,900,000 Factory overhead, variable 1,100,000 Factory overhead, fixed 3,000,000 Total costs 11,000,000 If BMW makes the components, the unit costs of direct material will increase by 10%. If BMW buys the components, 30% of the fixed costs will be avoided. The other 70% will continue regardless of whether the components are manufactured or purchased. Assume that variable overhead variable varies with output volume. 1. Prepare a schedule that compares the make-or-buy alternatives. Show totals and amounts per unit. Compute the numerical difference between making and buying. Assume that the capacity now used to make the components will become idle if the components are purchased. 2. Assume also that the BMW capacity in question can be rented to a local electronics firm for $1,150,000 for the coming year. Prepare a schedule that compares the net relevant costs of the three alternatives: make, buy, and leave capacity idle, buy and rent. Which is the most favorable alternative. By how much in total?

Explanation / Answer

Total cost if make = 11,000,000 - 5,000,000 + 5,000,000(1.1) = 11,500,000 Buy and Idle = 50*200,000 + 0.7*3,000,000 = 12,100,000 total and amounts per unit make = 11500000/200000 = 57.5 buy = 12100000/200000 = 60.5 numerical difference between making and buying = 600,000 Part 2 Buy and Rent = 12,100,000 - 1,150,000 = 10,950,000 This is best possible case. here total and amounts per unit = 10,950,000/200000 = 54.75

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