If you are the manager of a medium sized manufacturing company, what qualitative non-financial factors (any four), in addition to the quantitative/financial factors, should you consider when making a decision on whether to continue making a product/component in-house or buy it from an outside supplier at a cheaper price?
If you are the manager of a medium sized manufacturing company, what qualitative non-financial factors (any four), in addition to the quantitative/financial factors, should you consider when making a decision on whether to continue making a product/component in-house or buy it from an outside supplier at a cheaper price?
Related questions
Hello, I need a solution for this question please.
Make-or-Buy Decisions
Organizations are often faced with a make-or-buy decision-adecision of whether to make or to buy components or services usedin making a product or providing a service. For example, a factorycan make a component for a product in-house or purchase it from anoutside supplier.
Example: Each year, Ingmar Company produces13,100 units of a component used in microwave ovens. An outsidesupplier has offered to supply the part for $1.28. The unit costis:
Round intermediate calculations to the nearest cent. Use roundedanswers in subsequent computations, if required.
| Direct materials | $0.75 |
| Direct labor | 0.25 |
| Variable overhead | 0.18 |
| Fixed overhead | 2.42 |
| Total unit cost | $3.60 |
The alternatives for Ingmar Company are: continue making thecomponent in-house, or purchasing the component from the outsidesupplier. Assuming that none of the fixed cost is avoidable,determine which alternative is more cost effective: - Select youranswer -Make the component in-housePurchase from the outsidesupplierItem 1 . If Ingmar accepts the offer to purchase from theoutside supplier, operating income will be $ - Select your answer-higherlowerItem 3 .
Now suppose that Ingmar Company rents machinery capable ofmaking 13,100 units of the component per year and the annual leasecost is $13,100 (this is included in the fixed overhead for thecomponent). The lease can be cancelled whenever Ingmar wantswithout penalty. The machinery lease cost is - Select your answer-relevantnot relevantItem 4 . Determine which alternative is morecost effective: - Select your answer -Make the componentin-housePurchase from the outside supplierItem 5 . If Ingmaraccepts the offer to purchase from the outside supplier, operatingincome will be $ - Select your answer -higherlowerItem 7 .
The make-or-buy decision may be more complex than either examplenoted above. However, the key idea is that relevant costs andbenefits must be distinguished from irrelevant costs and benefits.Therefore, no matter how many costs are involved, the analyst candetermine the overall quantitative impact of making versus buying.Finally, the qualitative factors must be considered. For example,perhaps Ingmar Company believes that it can do a higher quality jobthan the outside supplier. Then, even if it were less expensive topurchase outside, the company could continue to make the componentin-house. Or, perhaps Ingmar Company could use the freed up spaceand workers to make a new, potentially very profitable, product.Then the company might decide to outsource the component even if itappears in the short-run to be a more costly approach.
Sardi Inc. is considering whether to continue to make acomponent or to buy it from an outside supplier. The company uses17,000 of the components each year. The unit product cost of thecomponent according to the company's cost accounting system isgiven as follows:
| Directmaterials | $ | 8.20 | |
| Directlabor | 8.30 | ||
| Variable manufacturing overhead | 1.20 | ||
| Fixedmanufacturing overhead | 4.30 | ||
| Unitproduct cost | $ | 22.00 | |
Assume that direct labor is a variable cost. Of the fixedmanufacturing overhead, 70% is avoidable if the component werebought from the outside supplier. In addition, making the componentuses 2 minutes on the machine that is the company's currentconstraint. If the component were bought, time would be freed upfor use on another product that requires 4 minutes on this machineand that has a contribution margin of $7.00 per unit.
When deciding whether to make or buy the component, what cost ofmaking the component should be compared to the price of buying thecomponent?
Question 32 options:
| |||
| |||
| |||
|
Iwasaki Inc. is considering whether to continue to make acomponent or to buy it from an outside supplier. The company uses13,900 of the components each year. The unit product cost of thecomponent according to the company's cost accounting system isgiven as follows: |
| Directmaterials | $ 9.70 |
| Direct labor | 6.70 |
| Variablemanufacturing overhead | 2.50 |
| Fixed manufacturingoverhead | 4.50 |
| Unit productcost | $23.40 |
Assume that direct labor is a variable cost. Of the fixedmanufacturing overhead, 30% is avoidable if the component werebought from the outside supplier. In addition, making the componentuses 2 minutes on the machine that is the company's currentconstraint. If the component were bought, this machine time wouldbe freed up for use on another product that requires 4 minutes onthis machine and that has a contribution margin of $6.10 perunit. |
When deciding whether to make or buy the component, what cost ofmaking the component should be compared to the price of buying thecomponent? (Round your intermediate calculations and finalanswer to 2 decimal places.) |
A $26.45
B $23.95
C $20.25
D $23.30
