Hahn Manufacturing purchases a key component of one of its products from a local
ID: 457618 • Letter: H
Question
Hahn Manufacturing purchases a key component of one of its products from a local supplier. The current purchase price is $1400 per unit. Efforts to standardize parts succeeded to the point that this same component can now be used in five different products. Annual component usage should increase from 150 to 650 units. Management wonders whether it is time to make the component in-house, rather than to continue buying it from the supplier. Fixed costs would increase by about $60,000 per year for the new equipment and tooling needed. The cost of raw materials and variable overhead would be about $1,000 per unit, and labor costs would be $250 per unit produced. a. Should Huhn make rather than buy? Hahn should __ the components, saving __ per year as compared to the other decision
Explanation / Answer
Lets calculate the total cost of manufacturing in house.
Per unit labour cost = $250
RM and Variable Overhead = $1000
Fixed costs= $60,000
Considering that the owner wants to recover the fixed cost in 1 year ,
Fixed cost per unit = 60000/650= 92.3
hence total cost component = Fixed cost+ Labour cost+ RM and Variable = 92.3+ 1000+250= $1342.3
Difference in price of in house and outsourced = 1400-1342.3 = $ 57.69
Total savings per year = 57.69*650= $ 37500 for 650 units
The inhouse product is cheaper. Hence owner is advised to make them rather than buy. :) :)
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