January 21, 2014 BU247
Make or buy: Would it be better for us to buy it from outside party or better for us to make it ourselves
-what are the costs to make it vs to buy it
-if you choose not to make it what are the avoidable fixed costs that you would need to take into
-consider the external costs (shipping, border cost, and quality control)
-the company who buys the product usually wears more damage if the product they purchase is broken
-have to consider the revenue that you would loose from not making the product
Problem 2- 39
Kane company is considering outsource a key component. A reliable supplier has quoted a price of $64.50 per unit. The following costs of the component when manufactured
in house are expressed are a per unit basis. Required:
a. what assumptions need to be made about the behaviour of overhead costs for Kane to order to analyze the outsourcing decision? **the fixed costs are avoidable
b. Should Kane Company outsource the component? if the $64.50 is an all inclusive price, then it is worth it to outsource Looking at just our avoidable costs, Kane should
outsource the product since he will save money What other factors are relevant to this decision need to consider the quality issues with the product > suppliers needs to live
up to our expectations because if anything goes wrong, we are the ones that suffer the damages likelihood of supplier increasing the price
Item Amount Avoidable?
Direct Materials $23.40 $23.40
Direct Labours $16.10 $16.10
Variable overhead $26.70 $26.70
Fixed Overhead $6.90 ?
Total costs $73.10 $66.20
Purchase price $64.50
a) What assumptions need to be made about the behaviour of overhead costs for Kane in order to analyze the
outsourcing decision? Fixed costs are avoidable
b) Should Kane company outsource the component?
-Looking at our avoidable costs, Kane should outsource the product since he will save money.
C) What other factors are relevant to this decisions?
-Quality issues with the product, supplier needs to live up to our expectations.
-Likelihood of supplier increasing the price.
Problem 2-40 Premier Company
Premier Company manufactures gear model G37, which is used in several of its farm equipment products. Annual production volume of G37 is 20 000 units. Unit costs for G27
are as follows (in bold) Alternatively, Premier can purchase gear model G37 from an outside supplier for $120 per unit. If G37 is outsourced, Premier can use the facility where
G37 is manufactured to produce G49. This would save Premier $113 000 in facility rental and other costs presently incurred Required Should Premier make or bury the G37?
By how much will Premier be better off by choosing your decision rather than the alternative? Therefore, due to the difference of $87 000, it does not make sense to outsource.
From a financial stand point, it would be better to produce the product yourself because it is much cheaper even though you could be using that facility to produce another
Unit Costs G37 Amount Avoidable
Direct Materials $55 $55
Direct Labour 30 30
Variable overhead 25 25
Fixed overhead costs 15
Total $125 $110 per unit
Purchase price $120
Difference $(10) more to outsource it
Production volume (annually) 20 000 units $(200 000)
Avoidable costs (facility rental) $113 000 113 000
Difference $(87 000) Required:
Should Premier make or buy the G37? By how much will Premier be better off by choose your decisions rather
than the alternative?
-Do not outsource you are better off making it yourself
Problem 2- 41 Fish Motors
P241 Fish Motors has manufactured compressor parts at its plan in Pitcairn, Indiana for the past 25 years. An outside supplier, Superior Compressor Company, has offered to
supple compressor model C38 at a price of $200 per unit. Current unit manufacturing costs for C38 are as follows Required:
a. Should Superior Compressor's offer be accepted if the Pitcairn plant is presently below capacity? **no matter which decision that the company makes, the fixed overhead
costs will not go away. So it does not matter which decision you make. **No, the company should not outsource
b. What is the maximum acceptable purchase price if the plant facilities are fully utilized in present and if any additional available capacity can be deployed for the production
of other compressors? **$213 is the maximum that the company is willing to pay **maximum (ceiling) = $213 **if we want to take something more on, we would have to build
more facilities additional. We are fully loading the charge.
Item Amount Make Buy
Direct Materials $80 $80
Labours 60 60
Variable overhead 56 56
Fixed overhead 17
Total costs $213 $196 $200
a) Should Superior Compressor’s offer be accepted if the Pitcairn plant is presently operating below capacity?
-NO! Since the total costs is lower than to buy the product.
b) What is the maximum acceptable purchase price if the plant facilities are fully utilized at present and if any
additional available capacity can be deployed for the production of other compressors?
-Maximum (ceiling price) = $213
If determining minimum (floor price) = $196
Problem 2-42: Georges Grill
P242 Georges Grill's analyzes profitability of 3 operating units, restaurant, bar, and billiards room. Revenues, variable costs, and attributable fixed costs (which can be avoided
if the unit is eliminated) for each unit as follows **George is planning on closing the billiard room Required
a. Ignoring remodeling costs, by how much will the bar segment margin have to increase for the grill's income to be at least as high as it is now? **$15 000 **he needs to make
sure that the bar will have an increase in segment margin by $15 000 otherwise, he is better off keeping the billiards room
b. What other things might George want to consider before making the decision to eliminate the billiards unit to expand the bar size? **the consideration of sales of other
product lines impacting sales (so