Assume that AI Muray reports the following costs to make 10.5 oz. bottles for it

ID: 2561953 • Letter: A

Question

Assume that AI Muray reports the following costs to make 10.5 oz. bottles for its Apple Jaike Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs Total Cost for 1,000,000 Bottles 80,000 30,000 60,000 Cost per Bottle 50.08 0.03 0.06 0,085 $255,000 Another manufacturer offers to sell Al Muray the bottles for $0.25. S50,000, a fixed cost, would be eliminated if the bottles were purchased e compares the costs to make and buy the 10.5 oz. bottles. Should Al Muray make or buy the Apart from the quantitative factors, what qualitative factors might influence the decision about whether to The capacity now used to make with a salary of a schedule that make or buy from the manufacturer (4 marks)

Explanation / Answer

Solution:

Part 1 --- Decision making whether to make or buy the bottle

The problem is related to Make a product in house or Buy the product from outside customer.

In this type of problem, we need to find out the relevant costs and savings associated with the each decisions whether to make or buy the product.

Relevant Cost means the cost which are relevant for decision making. The relevant cost is the future cost that will incur and different under each alternative course of action.

Here, relevant costs are variable cost such as Direct materials, direct labor and variable factory overhead because these cost will incur if company make the product in house.

Fixed factory overheads cost are treated as sunk cost. It plays no role in decision making since this is the cost which will continue to incur whether company make product in house or buy product from outside. However if there is any avoidable fixed overhead related to decision making, we need to consider the same in taking the decision.

Now, we analysis the cost for making a bottle and buy a bottle

Make in House

Buy from Outside Customer

Direct materials per bottle

$0.08

Direct labor per bottle

$0.03

Variable factory overhead per bottle

$0.06

Total Variable Cost per bottle

$0.17

Purchase Price offered by outside customer

$0.25

Total relevant Cost for 1,000,000 bottles

Make in house (1000,000*0.17)

$170,000

Buy from outside (1000,000*0.25)

250000

If Company makes bottles inside, company will incur $170,000 for 1000,000 bottles.

The total cost for buying 1000,000 bottles from outside is $250,000

But as per the question if company buys from outside, the company will be able to save Supervisor Salary $50,000.

Hence, the Net Cost if Company buy the product from outside = Total Cost $250,000 – Saving in Supervisor salary $50,000 = $200,000

Net Cost of Buying Production from Outside = $200,000

Total Relevant Cost for making product in house = $170,000

The cost for making in house is less than purchasing from outside. Hence Al Muray should MAKE the bottles in house.

Part 2 – Qualitative Factors about whether to make or buy decision making

1) Suppliers Trust Worthiness

2) Quality of the product

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question. Please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you