Lakeview Engine, Inc., produces engines for the watercraft industry. An outside

Question

Lakeview Engine, Inc., produces engines for the watercraft industry. An outside manufacturer has offered to supply several component parts used in the engine assemblies, which are currently being produced by Lakeview. The supplier will charge Lakeview $275 per engine for the set of parts. Lakeview’s current costs for those part sets are direct materials, $155; direct labor, $75; and manufacturing overhead applied at 100% of direct labor. Variable manufacturing overhead is considered to be 20% of the total, and fixed overhead will not change if the part sets are acquired from the outside supplier.

Required:

a. What would be the net cost advantage or disadvantage if Lakeview decided to purchase the parts?

b. Should Lakeview Engine, Inc., continue to make the part sets or accept the offer to purchase them for $275?

Lakeview Engine, Inc. should continue to make the part sets.
Lakeview Engine, Inc. should accept the offer to purchase the part sets for 275.

Explanation / Answer

a. What would be the net cost advantage or disadvantage if Lakeview decided to purchase the parts?

Relevant cost of making = direct materials, $155 + direct labor, $75 + variable manufacturing overhead ( 75 * 20 % ) $ 15 = $ 245

Relevant cost of buying = $ 275

There will be net cost disadvantage of ( 275 - 245 ) $ 30 per engine if Lakeview decided to purchase the parts.

b. Should Lakeview Engine, Inc., continue to make the part sets or accept the offer to purchase them for $275?

Lakeview Engine, Inc. should continue to make the part sets.

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