MAKE OR BUY PARTS AND COMPONENT DECISION P – 1.

A mother company produces most of its motor parts in its own plant. The company at present is considering of the feasibility of buying a part from an outside supplier for Rs. 40 per part if this were done monthly cost would increase by 10,000. The part under consideration is manufactured in the department along with numerous other parts. On account of discontinuing the average monthly uses production! of this part is "0,000 units. The cost of producing this part on per unit basis are, material Rs. 1#, labour half hour! Rs. "4, fi$ed overhead Rs. #. The company has the practice of applying manufacturing overhead on the basis of direct labours. %ormal production value in department 1 is 1&0,000 hours per month and current actual production is at about the same level. 'iscontinuing of the production of this part would cause an unfavorable volume variance of Rs. 1(0,000 per month in this department. Required: )hould the company ma*e or buy the parts+ )how calculation to support your answer. Note: Unfavorable volume variance of Rs. 160,000 indicates that there is no alternative use of facilities that they will remain idle if production is discontinued. Therefore, it is irrelevant cost. P – 2. The Raising ,anufacturing -o. produces a part which is finally assembled to its main product. The part is produced in two manufacturing steps. The normal annual production of the part is &0,000 units. The following are the standard cost of performing the manufacturing steps. Steps M !u" #turi! M !u" #turi! $ step 1 $ step 2 'irect material Rs. #",#00 Rs. ./,(00 'irect labour Rs. 110,400 Rs. 44,#00 0ariable overhead Rs. &&,"00 Rs. 44,1(0 1eneral overhead Rs. 4.,#40 2 The general overhead, comprising the fi$ed and variable overhead is allocated as Rs. /(,#00 3 104 of direct labour cost. The company can eliminate manufacturing step21, if it purchases parts from outside. The vendor will supply &0,000 units Rs. 4./& per unit. The company will have to pay freight of Rs. 10,000 on purchasing parts. 5f the parts are purchased, this will release space occupied for performing manufacturing step21 that can be rented for Rs. "0,000 per year. Re6uired7 )uggest the parts should be manufactured or purchased. P – % The 8lectric 86uipment ,anufacturing -ompany has a proposal of brining out a new machine. The machine re6uires an electric motor that the firm does not use in its current line of product. A local supplier has offered to supply any number of motors needed at the rate of Rs. 1&0 per motor. The delivery is guaranteed within 1& days to the order recommend. The production manager of the electric e6uipment manufacturing company thin*s that the firm could ma*e the motor by e$tensively

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00. P – ' The A<. (0.000 units by ma*ing the machine. it would re6uire materials costing Rs.000 per annum. 5n case. Required: 'etermine the machine should be bought or built in the factory+ P – . it is made. P rti#u& rs Rs.#0 per piece.000 .000 The accounts cler* e$plains the rationale of including the fi$ed costs in the analysis as follows.000 hours on the machine reduce "0. ". The .&0! &0. The e6uipment needed to convert the motors could be rented for Rs.&0 per hour.000 hours of labour time at Rs. 140.000 410. The firm would lose sales of "0. A company is considering opportunity to sub contract the production of a certain parts of its products to another manufacturer.000 :i$ed overhead "00. <ecause "0. of wor*ers and hour wor*ed can not be increased and since each wor*er ma*es 1 unit per hour using wor*er for "0.. The accountant of the firm has developed the following units costs based on the e$pected demand of 10. The sub contractor has offered to produce the part for Rs. 4"&. The firm incurs other variable costs at the rate of Rs. /! (0.000 hrs > Rs.000 units is 104 of e$pected budget sales for the year. The space could be available to ma*e motors at the rent of Rs.000 units per annum.oreover some space of the e$isting building rented out at Rs. 1&0.aterials &0 9abours &0 Rent for space 14 . 100 and cost variable e$penses are Rs.hether the motors should be made or brought from a local supplier.achinery rent 1& 0ariable overhead 11 :i$ed overhead "0 Re6uired7 . / per labour hour.000 and "0. The no.000 units available for sales. The following is the list for relevant costs in both the situations. would have to be vacated and re6uired for the purpose of storing materials.anagement Accountant ma*es a study of the saving of cost resulting from subcontracting as follows7 2 . 100. . the allocated 104 of total fi$ed manufacturing cost of Rs.000 0ariable overhead "0. 8ach unit of product sales for Rs. .000 per annum. "0. #&.000 9abour "0. P rti#u& rs M (e Bu+ )Rs.aterials 100.000 to the ma*ing of the machine.* )Rs.000 per annum.000 hrs > Rs.* =urchase price 4"&.converting an e$isting model.000 4"&.000 or made itself.".1.-ompany needs a new machine that it can either purchase from another firm for Rs.

/&0. The part. b.000 :actory overhead 140. which is named :a*tron.000 per year can be saved if the ?ob is subcontracted and that cost of special tools will be reduced by Rs.* )Rs. a. you develop the following data as being typical of the companyCs operations. is a component used in some of the finished products of the company.&00 per year. The reduction in variables overhead is estimated at Re 1 per unit.000 9ess selling B Administrative e$penses 100. The following were the total costs of the precision machinery department during the year under audit when &.000 units. c.000 Actual gross margin .0.000 %et income 9oss! "4. 5f they are purchased from an outside supplier.. The other relevant cost data in connection with the manufacturing of this product is as follows7 @nit sold 14.000 %et sales 14. 5t is believed by the plant superintendent that supervision costs to the e$tent of Rs.000    Total 10 ". :rom your audit wor*ing papers and from further investigation.)tandard unit cost of materials is reduced by &0 paise.000 The company is wor*ing at less than normal capacity which is manufacture of "0. Required: =repare comparative income statement to arrive decision whether to manufacture or purchase it from outside suppliers.e d Per u!it T/t & )Rs. The direct labour cost per unit reduced by "& paise.000 :i$ed ( 1"0.00.000 :a*trons were made7 . The annual re6uirement for :a*trons is &.000 units is as follows7 O-er. The lowest 6uotation from a supplier was D# per unit.(.000 Total standard cost of goods sold "/#. certain machinery will be sold and will realiEe its boo* value. management as*ed for your assistance in arriving at a decision whether to continue manufacturing a part or to buy it form an outside supplier.".000 'irect labour "#. :a*trons have been manufactured in the precision machinery department.&00 3 .* 0ariable 4 #0.hen you had completed your audit of The )coopa -ompany.000 )tandard cost or goods sold7 'irect materials .aterial D (. "& each Rs.000 9ess7 @nabsorbed factory overhead /(.000 A Rs.000 )tandard grow margin 11". P – 0.000! The brea* up of factory overheads into fi$ed and variable components at normal capacity level of "0.000 units of this production. .

000G 5ndirect labor D (.000 'epreciation10.000 =roperty ta$es and insurance #. has decided to diversity in order to stabiliEe sales throughout the year. 5nclude in your discussion the considerations that might be applied to the evaluation of the outside supplier.000 =ayroll ta$es and other benefits F. However. no additional fi$ed charges will be incurred to produce the product. The cost of the purchased :a*trons would be considered a precision machinery department cost. However.000 fi$ed charge will be absorbed by the product to allocate a fair share of the companyCs present fi$ed costs to the new product.000G =ower D/00 and other D&00.000 bo$es of -hap2off as the standard volume. materials handling.'irect labor &0. D &000.000 d.&00 =ower /. further e$pansion in future years will be initiated.#00 Other &. After considerable research. D1. a winter products line has been developed. and b! when :a*trons are bought from an outside supplier. 5f the product is a success. 'irect laborD". a D100. The sale of the e6uipment used for :a*trons would reduce the following costs by the amounts indicated7 depreciation D". because of the conservative nature of the company management. The product will be sold to wholesalers in bo$es of "4 tubes for D# per bo$.00 per bo$ 'irect materialsD/. "! 'iscuss the considerations in addition to the cost factors that you would bring to its attention when assisting management to arrive at a decision whether to ma*e or buy :a*trons.000G property ta$es and insurance.00 per bo$ Total overhead D1.&0 per bo$ 4 .&00G 'irect labor D"#.. The following additional precision machinery department costs would be incurred if :a*trons were purchased from an outside supplier7 freight.000. P – 1 The 0ernom -orporation. &0 cents per unitG indirect labor for receiving. which produces and sells to wholesalers a highly successful line of summer lotions and insect repellents. @sing the estimated sales and production of 100. e.000 9ight and heat&. The following precision machinery department costs apply to the manufacture of :a*tronsC . A natural area for the company to consider is the production of winter lotions and creams to prevent dry and chapped s*in.000 5ndirect labor"0. <ecause of available capacity. inspection etc. 0ernomCs president has decided to introduce only one of the new products for this coming winter.aterial D1. Required: 1! =repare a schedule showing a comparison of the total costs of the precision machinery department a! when :a*trons are made.. the accounting department has developed the following costs. The product selected called -hap2off! is a lip balm that will be sold in a lipstic*2type tube.

5nstead of sales of 100.0. The company is considering two courses of actions7 -ompletely replacing the old e6uipment with new e6uipment or buying sub assembles from a reliable outside supplier who has 6uoted a net price of Re.Total D(."0. additional e6uipment.10 for depreciation Rs. d. =roduction was (0.000 bo$es. b. 0. will have disposal value of Rs. 0. this incremental cost would be the only additional fi$ed cost re6uired even if sales increased to /00.0. 0.00. The frame companyCs old e6uipment for ma*ing sub2assembles is worm out.000 level is the goal for the third year of production.hat would be the ma$imum purchase price acceptable to the 0ernom -orporation for the tubes+ )upport your answer with an appropriate e$planation.000."4 depreciation! Rs.40 Total Rs. Total cost Re. 1. 0."& 'irect labour Rs.0. should the 0ernom -orporation ma*e or buy the tubes+ )how calculations to support your answer.000 units under operating condition very comparable to yours and should the following cost7 'irect material Rs."& direct labour Rs. . -onsider last yearCs e$perience of one of your ma?or competitors with identical e6uipment. .hat nonI6uantifiable factors should the 0ernom -orporation consider in determining whether it should ma*e or buy the lipstic* tube+ P –2. 1on .10 and fi$ed overhead Rs. revised estimates show sales volume at 1"&.10 for supervision! Rs. Required: a."&. :uture needs for the past two years reveal the following unit costs of manufacturing the subassembly. At this new volume. at an annual rental of D10. They produced 1.#0 5 .0. 0.000 each will last . must be ac6uired to manufacture the tubes.hat would be your answer to part -.000 bo$es. The company has the option of ma*ing and buying at the same time. costs would be reduced by 10 percent and direct material costs would be reduced by "0 percent.000 units a year. The purchase price of the empty tubes from the cosmetics manufacturer would be F0 cents per "4 tubes. years.! @nder these circumstances.40 variable overhead Rs. 0. The /00. it is estimated that direct labor and variable overhead.0. c. years contract for a minimum of &0. 1##. 5f the 0ernom -orporation accepts the purchase proposal. )hould the 0ernom -orporation ma*e or buy the tubes+ )how calculations to support your answer.0& :i$ed overhead 5ncluding Rs.&0 per bo$ 0ernom has approached a cosmetics manufacturer to discuss the possibility of purchasing the tubes for -hap2off.10 0ariable overhead Rs. The current disposal value of e6uipment will reduce direct labour and variable overhead by Rs. e.000 units in each of the past two years. 'irect materials Rs.000 bo$es. 0. .000./& per unit. The new e6uipment will cost Rs.0. if this alternative was considered+ )how calculations to support your answer. However.

.0& of old fi$ed overhead unit cost is allocated fi$ed overhead that will be unaffected by the decision.000 .0. a!. .000 units. Required: a.#0 9abours Rs. b! . The 8$tra <right .etal!Rs. .F0 each. The president as*s you to compare the alternative on a total annual cost basis and per unit basis for annual needs of (0.hat factors other then the above should be the accountant bring to the attention of management to assist them in the ma*ing their decisions+ 5nclude the consideration that management be applied to the outside supplier+ P – 3.hen bulb is purchased from 5ndia+ ii! . 0.ould the factory be benefited by establishing the bulb manufacturing section+ 1ive your decision in your own way.hen bulb is manufactured in factory+ T@ "040! P – 14 Jathmandu Jastha @dyog 9td.000 overhead The factory uses / 0olt <ulbs purchased from 5ndia at Rs. )o the following problems are forwarded to you for solution.000 units and . )teel )heet &0. The production 8ngineers have wor*ed out for this establishment and estimated the li*ely cost per unit as follows. P rti#u& rs Rs.000 )alaries .000 units+ At what volume level would from be indifferent between ma*e and buy+ )how your computation+ c. .aterials . assume that 0.:or this case.anufacturing -ompany has shown the following costs for the production of 10. 0.ould your answer to re6uire change if needs are &0.000 )alaries Rent of <uilding #. Required: The factory management re6uires your help in matters of cost analysis and decision ma*ing. 0."& :i$ed overheadRs.000 units of Torch 9ight.hat would be the unit cost of Torch 9ight+ i! .hich alternatives seems ma*ing attractive+ b. The factory management is considering to establish a bulb manufacturing section within the factory facilities.000 9abour -harges /0.echanics &.iscellaneous 11."0 The waste material of torch light can be used in the bulb ma*ing and this will reduce the bulb materials cost by &0 percent. 0. is considering two courses of action7 a! -ompletely replacing the old e6uipment with new e6uipment or 6 .000 Administrative #. "& percent of fi$ed overhead apportioned to bulb is not e$tra burden to the factory.

".00 . .00 'irect 9abour 0. -onsider last yearKs e$perience of one of your ma?or competitors with identical e6uipment. 4 ".00 0ariable Rs. / for depreciation and Rs.00 Required: i. Overhead . /0 each.aterial Rs. 'irect Rs.b! <uying subassemblies from outside.. The data relating to produce one unit of component N are presented below7 'irect . (00. / for supervision.& hour A Rs. L:or your computation.aterials Rs .anufacturing overhead based on '9H 0."0 for depreciation! 1". assume that any idle facilities cannot be put to alternative use.00 per hour! Total unit cost of production .00 0ariable Overhead 1. a company specialiEed in casting at present is producing a component called N used in the casting process. They produce 100.. -omparison of the alternatives on a total annual cost basis and on a per unit basis for annual needs of (0..hich alternative seems more attractive+ ii.000 units. /00.00 :i$ed Rs. -ost records for the past two years reveal the following unit cost of manufacturing the subassembly.M T@ "04#! P – 11.&0 Rs.000.000 units of component at an unit price of Rs. . The new e6uipment will cost Rs. 10.000. Overhead /.0.ould your answer to re6uire change if needs were .000 units. years and will have disposal value of Rs.&0 :i$ed Overhead includes Rs.& hour A Rs. /0. The %epal -asting 9td. The life of the e6uipment is . The 7 .&0 per unit.. The increase in machine speeds will reduce direct labour and variable overhead by Rs. 1". 1. The current disposal value of the old e6uipment is Rs. &.00 The company received an offer from a company showing willingness to supply &0. The annual need of Kcomponent NK is &0. )how your computation.000 units under operating conditions very comparable to yours and showed the following units costs7 'irect ..00 "4. . .aterials .000.& per unit.&0 'irect 9abour /. Also assume that Rs.000 units.& of the old unit cost is allocated fi$ed overhead that will be unaffected by the decision. The sales man for the new e6uipment has summariEed his position as follows.00 The fi$ed overhead includes Rs.( per hour! /.&0 'irect 9abour Rs.(40. The purchasing price of the subassemblies is Rs.

4 per hour. The budgeted fi$ed overhead per annum is Rs.000 #. he company’s accounting department reports the following cost of producing the subassembly internally. has been purchasing a component called KNK from the supplier at a cost of Rs. per '9H /0 Other variable e$penses Rs.144.000 Rs. )hould the company stop producing the subassemblies internally and start purchasing from the outside supplier+ ii.000 direct labour hour per year.1# 25444 u!its Rs. The .000 subassemblies a year at a firm price of Rs. "&0. (0 Rs.000. Required: i.000 1(. unit 100 ! . .ould the decision made in i! above change in case the space being used to produce subassemblies would generate a segment margin of Rs. available could be rented out at an annual rent of Rs.ould your answer be different if the e$cess capacity thus."4.000 40.00 0 /".0 00 The company has ?ust received an offer from an outside supplier who will provide #./ 4 1 / " & Rs. 100. The selling price and the details of cost have been summariEed below7 )elling Rs. 10 per units.000. A company is now producing small subassemblies that are used in the production of one of the company’s main product lines.1& each. T@ "0&#! P – 1%. Required: a! )hould the company start purchasing component N from the supplier or continue to produce its own+ b! . 'irect materials 'irect labour 0ariable overhead )upervisorCs salary 'epreciation of special e6uipment Allocated general overhead Per u!it Rs. The company at present has sufficient e$cess capacity unutiliEed and a subcontracting of the component will further render idle unutiliEed capacity having no alternatives uses. All manufacturing overheads are applied to production on the basis of direct labour hour at Rs.&0.ettle 5ndustry 9td. 1"& per unit 'irect labour A Rs.000 "4.company has followed as system of defining its plant capacity in terms of direct labour hours. 10 'irect material cost Rs. The normal operation is 100.000+ T@ "0&1! P – 12. including cost of (0 component! Total variable cost per Rs.

8ach unit of finished product will need 0. " per e$penses unit Required: 1.000 D 1. 5f it does so the company should have to divert additional capacity of "000 machine hours over and above the unutiliEed e$cess capacity for the production of component.000 7 115.&0 machine hours.00.&4 of the capacity in the past. )uppose 8aton is about to ma*e some final decisions regarding the use of its manufacturing facilities for the coming year. The engineering product designing departments have prepared the production cost details of the component KNG as under 'irect material Rs.000 pertaining to some supervisory and -ustodian personnel could be avoided.000 units 'irect material 'irect labour 0ariable factory overhead :i$ed factory overhead T/t & 6 !u" #turi!$ #/sts D 4.&0. based in -leveland. / per unit Other variable Rs.000. " .000 D /.The annual fi$ed cost for the capacity volume of "0. Opportunity cost of alternative if any P – 1' 8aton -orporation.000 D /.00. and supervisory salaries. insurance. commercial. depending on whether 8atonCs facilities are fully occupied. The fi$ed overhead consists of depreciation. 'ifferential cost analysis of the alternative ".9. is a global manufacturer of highly engineered products that serves industrial. vehicle. therefore it would li*e to see the possibility of producing of its own component KNK re6uired for the finished product. property ta$es. / per cost unit 'irect labour cost Rs. construction. &00. a *ey component of an emission control system7 Total costs &0.00. All the fi$ed overhead would continue if 8aton bought the component e$cept that the cost of D 1.N.000 machine hours will be Rs. and semiconductor mar*ets. The following are the costs of ma*ing part . The industry had been able to utiliEe only . 5t fre6uently subcontracts wor* to other manufacturers.45444 for -ost unit D# D( D/ D( 7 2% per Another manufacturer has offered to sell the same part to 8aton for D "0 each.00. aerospace. Required: )hould 8aton buy or ma*e parts+ )how computations.

"0.00. 1&. 'irect material cost of the company includes cost of " units of component R used in the finished product. 1#0.. :or this the product designing department has prepared the following estimation of cost of producing one unit of component KRK. 1& /0 . All other costs are for manufacturing components other than R and finishing the product.000 .00 Rs.P – 1. c! =repare a differential cost analysis to see whether the company should ma*e its component KRK or continue to outsource it from outside mar*et.40 Total Rs.1(0 'irect labor " '9H A Rs. P – 10.000 units 'irect .00 Rs.00 Rs. ". The purchasing cost of component R is Rs."40.rite a brief report with all relevant information to the e$ecutive committee regarding your recommendation.000.aterial 1# D&0. )elling price per unit of the finished product is Rs. e$ecutive in 1ermany is trying to decide whether the company should continue to manufacture an engine component or purchase it from :ran*fort -orporation for D &" each. d! . 'emand for the coming year is e$pected to be the same as for the current year.anufacturing overheads 1 machine hour A Rs.&0 machine hour A Rs. b! 5dentify the feasible alternatives of the problem. &0 per unit.00. at present has been buying a component called KRK. and the budgeted fi$ed cost for the year "00( is Rs. 40 40 Total cost per unit "/0 present is as follows7 The management has been considering manufacturing the component R itself with in the company.00 The company has been able to utiliEe only (04 of its capacity in the past and it does not e$pect a change in the situation in future. 1& . The detailed manufacturing cost of one unit of finished product at 'irect materials Rs.000 machine hours per year. Radar 5nc. The company has a normal capacity of (. "&. 'irect material 'irect laborG 1 '9H A Rs. Required a! 'iagnose the problem associated with this case.anufacturing overheadG 0. used in its finished product. (0.. )uppose a <.

Tabulate a comparison of the net relevant costs of the three alternatives7 ma*e..000 for coming year.000 units.00.000 5f the company buys components. Tabulate a comparison of the ma*e or buy alternatives. ma*es the components. 104 of the fi$ed overhead will be avoided. )how totals and amounts per unit.00. At present. Required: 1. the units costs of direct material will increase 104. capacity in 6uestion can be rented to electronics firm for D1"."&.000 #00.000 4. H5. .00. The other (04 will continue regardless of whether the components are manufactured or purchased. 'ifferential cost analysis of ma*e or busy alternatives showing total cost and per unit cost.000 D11.000 pieces. The annual need of ORemote -ontrolO is &0. ..000 D"&.. The data relating to producing one piece of remote control is given below7 11 .000 D1. ". 'emand for the coming year is e$pected to be the same as for the current year.000 5f <.'irect 9abor :actory Overhead 0ariable! :actory Overhead :i$ed! D1F.000 1.&0. b. what will be your decision+ d. 5f idle capacity can be rented out for D"&0. it is producing the re6uired remote control by itself. 404 of the fi$ed costs will be avoided. Toyota company is considering to decide whether the company should continue manufacturing one of its components or purchase it from outside suppliers for D100 each. 'ata for the current year are as follows7 • • • • 'irect materials 'irect labour 0ariable overhead :i$ed overhead Total D".hat are the 6ualitative factors that should be considered in ma*e and buy component decision+ P – 12. Assume that the <. 5f <. -ompute the numerical difference between ma*ing and buying. 8lectronics has specialiEed in manufacturing high 6uality televisions.00. 'ecision regarding desirability of alternatives c. buys the components.000.000 400. 40.000 for the coming year. buy and rent. Assume that the capacity now used to ma*e the components will become idle if the components are purchased."00.hich is the most favourable alternative+ <y how much in total+ P – 11.000. buy and leave capacity idle. The remaining F04 will continue regardless of whether the components are manufactured or purchased. Required: a.

40 per hour. 12 . and supervisory salaries. Required: )hould 8aton buy or ma*e parts+ )how computations.& hour A Rs. 5t fre6uently subcontracts wor* to other manufacturers. T/t & #/st /" pr/du#ti/! "0 Rs. )uppose 8aton is about to ma*e some final decisions regarding the use of its manufacturing facilities for the coming year.000 direct labour hours per year. 8aton -orporation.00.000 pieces of remote conrols at a unit price of Rs. aerospace. insurance. 40 Rs. The company has followed a system of defining its plant capacity in terms of direct labour hours.'irect material Rs.000 pertaining to some supervisory and -ustodian personnel could be avoided. Required: )hould the company start purchasing the remote controls from the supplier or shout it continue to produce them on its own+ 8$plain your answer with the support of a differential cost statement.anufacturing overhead based on direct labour hours A Rs. a *ey component of an emission control system7 Total costs for &0.000 D /. received an offer from a company that showed a willingness to supply &0. construction.000 D 1.9. P – 13. commercial. vehicle. property ta$es. The normal operation is 1. depending on whether 8atonCs facilities are fully occupied. and semiconductor mar*ets. "0 'irect labour 0.000 7 115.&0.N. The budgeted fi$ed overhead per annum amount to Rs.000.000 D /. The following are the costs of ma*ing part .00. based in -leveland. The company at present has a sufficient e$cess capacity unutiliEed and a subcontracting of the component will further render the idle capacity. (0 per hour .00. 14 H5. /0 per hour Rs.00.000 -ost unis unit 'irect material 'irect labour 0ariable factory overhead :i$ed factory overhead T/t & 6 !u" #turi!$ #/sts D 4.00. (0 per remote control. All the fi$ed overhead would continue if 8aton bought the component e$cept that the cost of D 1. "&. The fi$ed overhead consists of depreciation. is a global manufacturer of highly engineered products that serves industrial.45444 D# D( D/ D( 7 2% per Another manufacturer has offered to sell the same part to 8aton for D "0 each.00. All manufacturing overhead are applied to the production on the basis of direct labour hours at Rs.

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