McMullen Co. uses 10,000 units of Part X each year as a component in the assembl
ID: 2415417 • Letter: M
Question
McMullen Co. uses 10,000 units of Part X each year as a component in the assembly of one of its products. The company is presently producing Part X internally at a total cost of $125,000 as follows. Direct materials $40,000 Direct labor 30,000 Variable manufacturing overhead 25,000 Fixed manufacturing overhead 30,000 Total costs $125,000 An outside supplier has offered to provide Part X at a price of $10 per unit. If McMullen stops producing the part internally, one third of the fixed manufacturing overhead would be eliminated. Required: Prepare a make-or-buy analysis showing the annual advantage or disadvantage of accepting the outside supplier's offer. Please state clearly whether the part should be made or bought and share your work
Explanation / Answer
It is a buy.
The follwing are the advantages:-
1) Cost of producing component X is $125000/-
No. of components produced are 10000 units.
Therefore the cost of component = 125000/10000 = $12.5/unit.
Whereas the outside supplier is providing the component at $10/unit. We save $2.5/unit, total of $25000 yearly.
Also one third of our fixed manufacturing overhead will be eliminated = 1/3*30000 = $10000 yearly.
Therefore the total saving per year would be $35000.