BUS 5110-01 Managerial Accounting

Dr. Rebecca Attah (Instructor)

Date: February 23, 2022

Case Study:

A vacuum manufacturer has prepared the following cost data for manufacturing one of its engine

components based on the annual production of 50,000 units.

Description Cost per Month

Direct Materials $75,000

Direct Labor $100,000

Total $175,000

In addition, variable factory overhead is applied at $7.50 per unit. Fixed factory overhead is

applied at 150% of direct labor cost per unit. The vacuums sells for $150 each. A third party has

offered to make the engines for $60 per unit. 75% of fixed factory overhead, which represents

executive salaries, rent, depreciation, and taxes, continue regardless of the decision. Should the

company make or buy the engines?

 Description Cost per Month

Sales $150 ($150 x 50,000 = $7500,000)

Variable Factory Overhead $7.50 ($7.50 x 50,000 = $375,000)

Direct Materials $75,000

Direct Labor $100,000

Fixed Factory Overhead $66,700 = ($100,000 /150 x100)

Vacuum Manufacturer Cost Data

(Alternative 1)

Sales $7,500,000

Variable Cost $550,000

Contribution Margin $6,950,000

Fixed Costs $66,700

Total $6,883,300

Description Cost per Month

Sales $60 ($60 x 50,000 = $3,000,000)

Fixed Factory Overhead $133,300 = ($100,000 /75 x100)

Third Party Cost Data Analysis

(Alternative 2)

Sales $3,000,000

Variable Cost $0

Contribution Margin $3,000,000

Fixed Costs $133,300

Total $2,866,700

Differential Analysis Alternative 1 is

Sales $4,500,000 Higher

Variable Cost $550,000 Higher

Contribution Margin $3,950,000 Higher

Fixed Costs ($66,600) Lower

Total $4,016,600 Higher

From the Differential Analysis Alternative 1 (Vacuum Manufacturer Cost Data) is higher than

Alternative 2. Therefore, the company should buy the engines from the Third Party, Alternative

2.