Outsourcing (“Make vs. Buy”) Decision: SHOW ALL WORK. Bueter, Giles & Walters In
ID: 2426469 • Letter: O
Question
Outsourcing (“Make vs. Buy”) Decision:
SHOW ALL WORK.
Bueter, Giles & Walters Industries, Inc. currently outsources an electrical switch that is a component in one of its gaming products. The switches cost $15 each. During a planning meeting, the company is considering making the switches internally at the following projected annual production costs:
Management expects annual demand of 13,000 switches. If the company makes the product, it will hire a production supervisor as indicated above. The company will also have to utilize factory space currently being leased to another company for $24,000 per year. The facility-level costs shown represent an allocation of company overhead that would be assigned to the product if it is made internally. If the management decides not to make the product internally, these facility-level costs would be assigned to other product lines within the business.
Required:
a) Prepare an “Outsourcing” (Make vs. Buy) analysis to determine whether the company should continue to buy the switches or produce them in-house. I recommend any opportunity costs be treated as a “cost of buying”. A suggested format is shown below.
Show work and clearly state the conclusion.
MAKE (13,000 switches)
BUY (13,000 switches)
Relevant Item
Unit (if we can)
Total
Unit
Total
b) Notate the “Cost Formula” to make the switches at the 13,000 unit level (i.e. Y = A + b(X))
Unit-Level material cost $3 Unit-Level labor cost $2 Unit-Level overhead $1 Batch-Level set-up cost (5,000 units per batch) $25,000 Product-Level supervisory salaries $37,500 Allocated facility-level costs $20,000Explanation / Answer
Cost Formula (Y)= 156500+6x
Relevant Cost for making 13000 switches Particulars Working Amount($) Material Cost 3*13000 39000 Labour 2*13000 26000 Overhead 1*13000 13000 Batch Level Set up cost 3*25000 75000 Product Level Supervisory salary 37500 Allocated facility Level Cost 20000 Oppurtunity cost of Leased Land 24000 Total Relevant Cost 234500 Cost per Unit of Making 234500/13000 18.03846 Cost per unit of Buying 15 Since benefit of Buying is better than making and hence the same should be bought form outsideCost Formula (Y)= 156500+6x
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