Driverless Delivery Vehicles (DDV) manufactures “driverless” vans.

To date, it has a superb safety record in the

industry.

As part of its manufacturing process, DV makes 10,000 units per year of Part X1 (one of many parts it
produces). Part X1 is used in the top selling model DDV manufactures. The unit product cost of the X1 based
on 10,000 units as follows:

Direct Materials $ 13.20

Direct Labor $ 20.80
Variable Mfg Ovh $ 3.00
Fixed Manufacturing Ovh $ 10.90
X1 Unit Product Cost $ 47.90

Outsourcing Parts Ltd, (OPL), an outside supplier, has offered to sell DDV all of its X1 parts needs for $42.30 a
unit.

If DDV accepts this offer, the facilities now being used to make the X1 part could be used to make more units of
another part , the X3, which is in high demand. The additional contribution margin on the X3 would be $39,000
per year and $64,000 of the X1 fixed manufacturing overhead costs would remain and be allocated to the X3.
perb safety record in the Q1: How much of the unit product of $ 47.90 is relevant to this Make or
List all the relevant components of the unit product cost.
f many parts it
ct cost of the X1 based

rts needs for $42.30 a Q2. DDV's accountant claim that by accepting the offer from OPL, DDV will save
by buying the X1 from OPL. Is that true? Show your calculations to support your answer.
ed to make more units of
the X3 would be $39,000 a) Will DDV save $95,000 when they buy the X1 from O
be allocated to the X3. Yes or No

b) Calculations to determine answer to a)

is relevant to this Make or Buy decision?

DDV will save $ 95,000

o support your answer.

hen they buy the X1 from OPL?

e answer to a)
Driverless Delivery Vehicles (DDV) manufactures “driverless” vans. To date, it has a superb safety record in the
industry.

As part of its manufacturing process, DV makes 10,000 units per year of Part X1 (one of many parts it
produces). Part X1 is used in the top selling model DDV manufactures. The unit product cost of the X1 based
on 10,000 units as follows:

Direct Materials $ 13.20

Direct Labor $ 20.80
Variable Mfg Ovh $ 3.00
Fixed Manufacturing Ovh $ 10.90
X1 Unit Product Cost $ 47.90

Outsourcing Parts Ltd, (OPL), an outside supplier, has offered to sell DDV all of its X1 parts needs for $42.30 a
unit.

If DDV accepts this offer, the facilities now being used to make the X1 part could be used to make more units of
another part , the X3, which is in high demand. The additional contribution margin on the X3 would be $39,000
per year and $64,000 of the X1 fixed manufacturing overhead costs would remain and be allocated to the X3.
erb safety record in the Q1: How much of the unit product of $ 47.90
List all the relevant components of the unit product cost.
many parts it
t cost of the X1 based Direct Materials $ 13.20
Direct Labor $ 20.80
Variable Mfg Ovh $ 3.00
Reallocated Fix Ovh $ 4.50 $ 10.90
Total Rel Cost $ 41.50

$ 10.90
Fix Ovh reallocated - stays
$ 4.50

ts needs for $42.30 a Q2. DDV's accountant claim that by accepting the offer from OPL, DDV will save
by buying the X1 from OPL. Is that true? Show your calculations to support your answer.
d to make more units of
he X3 would be $39,000 No a) Will DDV save $95,000 when they buy the X1 from O
be allocated to the X3. Yes or No

b) Calculations to determine answer to a)

Total Rel Costs to buy $ 423,000 $ 42.30

$ (39,000) Additional contribution margin from
$ 64,000 Allocation of X1 Ovh to the X3
$ 448,000

Total Rel Costs to make $ 479,000 $ 47.90

Net Change $ (31,000)

Buy Cheaper than Make

Net Cost to Make $ 415,000 $ 41.50

Purch of X1 $ 423,000 $ 42.30

Add'l x3 cont. mgn $ (39,000)
Net Cost to Buy $ 384,000

Buy < Make $ 31,000

Buy
Cost to buy x1 $ 423,000 $ 42.30
Additional CM $ (39,000)
Net Cost to Buy 384,000

Cost Reduction 415,000 $ 41.50

Buy < Make (31,000)
 is relevant to this Make or Buy decision?

Total Fix Ovh / # $ 6.40 Remaining Fixed Cost

$ 64,000 Remaining Total Fixed Cost
10,000 x1 units mfg

Total Fix Ovh / # $ 109,000

Fix Ovh reallocated - stays $ 64,000
Fix Ovh removed $ 45,000

ffer from OPL, DDV will save $ 95,000

calculations to support your answer.

e $95,000 when they buy the X1 from OPL?

o determine answer to a)

10,000
Additional contribution margin from other part
Allocation of X1 Ovh to the X3

10,000

10,000

10,000

10,000 units
10,000 units