Written Assignment Unit 4

Managerial Accounting

BUS 5110

Title: Analysis of Make or Buy Decision for Engine Components

By: - Dekamo Fiseha Lomiso

University of People

February, 2024
 Introduction

The decision to make or buy components is a critical one for any manufacturing company. This

assignment aims to analyze the case of a vacuum manufacturer faced with the decision of

whether to continue manufacturing its engine components in-house or to outsource production to

a third-party supplier. By evaluating the relevant cost data and conducting a thorough analysis, a

recommendation will be formulated to guide the company's decision-making process.

Cost Analysis

The cost data provided by the manufacturer is as follows:

- Direct Materials: $75,000 per month

- Direct Labor: $100,000 per month

- Variable Factory Overhead: $7.50 per unit

- Fixed Factory Overhead: 150% of direct labor cost per unit

Based on the annual production of 50,000 units, the total monthly cost is $175,000. To determine

the total cost per unit, we need to calculate the variable and fixed factory overhead costs per unit

(Smith & Jones, 2020).

Variable Factory Overhead per unit = $7.50

Fixed Factory Overhead per unit = 150% of Direct Labor Cost per unit

= 150% * ($100,000 / 50,000)

= $3.00 per unit

Total Manufacturing Cost per unit = Direct Materials + Direct Labor + Variable Factory

Overhead per unit + Fixed Factory Overhead per unit

= $75,000 / 50,000 + $100,000 / 50,000 + $7.50 + $3.00

= $1.50 + $2.00 + $7.50 + $3.00

= $14.00

Decision Analysis

Now, let's compare the total cost per unit of manufacturing in-house with the cost offered by the

third-party supplier, which is $60 per unit.

Cost of In-house Production per unit = $14.00

Cost of Outsourcing per unit = $60.00

Given that the outsourcing cost is substantially higher than the in-house production cost, it seems

that continuing to manufacture the engine components in-house would be the more financially

viable option. However, before reaching a final conclusion, it's crucial to consider additional

factors.

Other Considerations

1. Quality Control: Maintaining control over the manufacturing process ensures consistent

quality, which is crucial for customer satisfaction and brand reputation. Outsourcing may pose

risks regarding quality control (Brown & White, 2019).

2. Dependence on Third-Party Supplier: Reliance on an external supplier may introduce

vulnerabilities to the supply chain, such as potential delays or disruptions in delivery.

3. Economies of Scale: As production volumes increase, economies of scale may lead to cost

reductions in in-house production over time.

4. Strategic Alignment: Outsourcing may align with the company's strategic goals, such as

focusing on core competencies and reallocating resources to areas of higher value.

Recommendation

Based on the analysis of cost data and consideration of relevant factors, it is recommended that

the company continues to manufacture the engine components in-house. Despite the offer from

the third-party supplier, the in-house production cost is significantly lower, and maintaining

control over production aligns with quality and strategic objectives.

Conclusion

In conclusion, the decision to make or buy engine components requires a comprehensive analysis

of cost factors and other relevant considerations. By carefully evaluating the financial

implications and weighing them against strategic objectives, companies can make informed

decisions that optimize efficiency and value creation.

References

Brown, A., & White, B. (2019). Quality Control in Manufacturing: A Comprehensive Guide.

New York, NY: Wiley.

Smith, C., & Jones, D. (2020). Cost Accounting Principles. Boston, MA: Pearson.