ACTG 2011 Lecture : Homira Osman
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This is a make or buy problem that has all of thecharacteristics illustrated in the Make or Buy lectures and relatedstudy problems. Note that you are not asked for the total makecosts and the total buy costs, but instead, the difference betweenthese two total cost computations. Make sure that you read thequestion carefully so that you attach the correct sign (+ or -) toyour numerical answer.
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Lynn Hart is a managerial accountant at Paibec Corporation.Paibec is under intense cost competition, and Hart has been askedto evaluate whether Paibec should continue to manufacture partMT-RF or purchase it from Marley Company. Marley has submitted abid to supply the 34,000 MT-RF units that Paibec will need for 2011at a price of $18.20 each. Paibec has capacity available to producethe 34,000 units.
From plant records and interviews with John Porter, the plantmanager, Hart gathered the following information regarding Paibec'scosts to manufacture 31,000 units of MT-RF in 2010:
Direct materials | $210,800 |
Direct labor | 155,000 |
Plant space rental | 84,000 |
Equipment lease | 33,000 |
Other overhead | 260,400 |
Total | $743,200 |
Additionally, Porter tells her:
Variable costs per unit in 2011 will be the same as variablecosts per unit in 2010.
If MT-RF is purchased from Marley, plant space will not have tobe rented, and equipment will not have to be leased. But these areannual contracts that are going to be expensive to wiggle out of.Porter estimates it will cost $11,000 to terminate the plant rentalcontract and $5,500 to terminate the equipment lease contract.
60% of the other overhead is fixed and is expected to remain thesame whether MT-RF is manufactured by Paibec or outsourced toMarley. The variable component of other overhead is proportional toproduction.
Hart is aware that cost studies can be threatening to currentemployees because the findings may lead to reorganizations andlayoffs. She knows that Porter is concerned that outsourcing MT-RFwill result in some of his close friends being laid off. Therefore,she performs her own independent analysis of competitive and othereconomic data, which reveals that:
Direct materials and direct labor wage rates are likely to behigher by 6% and 5%, respectively, in 2011 compared to 2010.
The plant rental and equipment lease contracts can, in fact, beterminated by paying $10,000 and $4,500, respectively.
Paibec can actually save $20,000 of the fixed portion of otheroverhead costs if MT-RF is purchased from Marley.
REQUIRED [Note: Round unit cost computations to the nearestcent]
Based on Hart's estimates, by how much will Paibec's profitschange if MT-RF is purchased fromMarley? (Note: if the buy costsare less than the make costs, enter the difference as a positivenumber; if the make costs are less than the buy costs, enter thedifference as a negative number.)
This is a make or buy problem that has all of thecharacteristics illustrated in the Make or Buy lectures and relatedstudy problems. Note that you are not asked for the total makecosts and the total buy costs, but instead, the difference betweenthese two total cost computations. Make sure that you read thequestion carefully so that you attach the correct sign (+ or -) toyour numerical answer.
______________________________________________________
Lynn Hart is a managerial accountant at Paibec Corporation.Paibec is under intense cost competition, and Hart has been askedto evaluate whether Paibec should continue to manufacture partMT-RF or purchase it from Marley Company. Marley has submitted abid to supply the 37,000 MT-RF units that Paibec will need for 2011at a price of $16.40 each. Paibec has capacity available to producethe 37,000 units.
From plant records and interviews with John Porter, the plantmanager, Hart gathered the following information regarding Paibec'scosts to manufacture 34,000 units of MT-RF in 2010:
Direct materials | $210,800 |
Direct labor | 136,000 |
Plant space rental | 83,000 |
Equipment lease | 36,000 |
Other overhead | 244,800 |
Total | $710,600 |
Additionally, Porter tells her:
Variable costs per unit in 2011 will be the same as variablecosts per unit in 2010.
If MT-RF is purchased from Marley, plant space will not have tobe rented, and equipment will not have to be leased. But these areannual contracts that are going to be expensive to wiggle out of.Porter estimates it will cost $10,500 to terminate the plant rentalcontract and $5,000 to terminate the equipment lease contract.
60% of the other overhead is fixed and is expected to remain thesame whether MT-RF is manufactured by Paibec or outsourced toMarley. The variable component of other overhead is proportional toproduction.
Hart is aware that cost studies can be threatening to currentemployees because the findings may lead to reorganizations andlayoffs. She knows that Porter is concerned that outsourcing MT-RFwill result in some of his close friends being laid off. Therefore,she performs her own independent analysis of competitive and othereconomic data, which reveals that:
Direct materials and direct labor wage rates are likely to behigher by 8% and 4%, respectively, in 2011 compared to 2010.
The plant rental and equipment lease contracts can, in fact, beterminated by paying $9,500 and $4,000, respectively.
Paibec can actually save $20,000 of the fixed portion of otheroverhead costs if MT-RF is purchased from Marley.
REQUIRED [Note: Round unit cost computations to the nearestcent]
Based on Hart's estimates, by how much will Paibec's profitschange if MT-RF is purchased fromMarley? (Note: if the buy costsare less than the make costs, enter the difference as a positivenumber; if the make costs are less than the buy costs, enter thedifference as a negative number.)