This is a make or buy problem that has all of the characteristics illustrated in
ID: 2416791 • Letter: T
Question
This is a make or buy problem that has all of the characteristics illustrated in the Make or Buy lectures and related study problems. Note that you are not asked for the total make costs and the total buy costs, but instead, the difference between these two total cost computations. Make sure that you read the question carefully so that you attach the correct sign (+ or -) to your numerical answer.
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Lynn Hart is a managerial accountant at Paibec Corporation. Paibec is under intense cost competition, and Hart has been asked to evaluate whether Paibec should continue to manufacture part MT-RF or purchase it from Marley Company. Marley has submitted a bid to supply the 37,000 MT-RF units that Paibec will need for 2011 at a price of $16.40 each. Paibec has capacity available to produce the 37,000 units.
From plant records and interviews with John Porter, the plant manager, Hart gathered the following information regarding Paibec's costs to manufacture 34,000 units of MT-RF in 2010:
Additionally, Porter tells her:
Variable costs per unit in 2011 will be the same as variable costs per unit in 2010.
If MT-RF is purchased from Marley, plant space will not have to be rented, and equipment will not have to be leased. But these are annual contracts that are going to be expensive to wiggle out of. Porter estimates it will cost $10,500 to terminate the plant rental contract and $5,000 to terminate the equipment lease contract.
60% of the other overhead is fixed and is expected to remain the same whether MT-RF is manufactured by Paibec or outsourced to Marley. The variable component of other overhead is proportional to production.
Hart is aware that cost studies can be threatening to current employees because the findings may lead to reorganizations and layoffs. She knows that Porter is concerned that outsourcing MT-RF will result in some of his close friends being laid off. Therefore, she performs her own independent analysis of competitive and other economic data, which reveals that:
Direct materials and direct labor wage rates are likely to be higher by 8% and 4%, respectively, in 2011 compared to 2010.
The plant rental and equipment lease contracts can, in fact, be terminated by paying $9,500 and $4,000, respectively.
Paibec can actually save $20,000 of the fixed portion of other overhead costs if MT-RF is purchased from Marley.
REQUIRED [Note: Round unit cost computations to the nearest cent]
Based on Hart's estimates, by how much will Paibec's profits change if MT-RF is purchased from Marley? (Note: if the buy costs are less than the make costs, enter the difference as a positive number; if the make costs are less than the buy costs, enter the difference as a negative number.)
Direct materials $210,800 Direct labor 136,000 Plant space rental 83,000 Equipment lease 36,000 Other overhead 244,800 Total $710,600Explanation / Answer
Total cost
778972
749180
As per our cost comparison we find that if we outsoursing our project then we can save 29792$ so better is outsourse the project
Cost for production If Own production Total price for 37000 unit Amount in $ Direct material(210800/34000*37000)+8% 247752 Direct Labor(136000/34000*37000)+4% 153920 Plant space Rental(83000+9500) 92500 Equipment Lease(36000+4000) 40000 Other Overhead 244800Total cost
778972
Cost For Outsoursing If purchase from marley Amount in $ Total price for 37000 unit 606800 Plant rental unavoidable 10500 Cost for termination of lease 5000 Other overhead fixed to both project(60%) 146880 Total cost 769180 Total Savings from fixed overhead 20000 Actual cost for 37000 units749180
Comparison of cost Cost For Outsoursing 749180 Cost for production 778972 Differents (29792)As per our cost comparison we find that if we outsoursing our project then we can save 29792$ so better is outsourse the project
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