An analysis of per unit and total costs for $32,000 units shows that the Midwest Division should purchase the parts from Marley Company for saving of $15,440. Because the costs of purchase is less than the costs of make. So, the Midwest Company should purchase the equipment.
i. Cost per unit Make Purchase Difference
Bid price from Marley $ 17.30
Direct material ($195,000/30,000)*1.08 $7.02
Direct labor ($120,000/30,000)*1.05 $4.20
Factory space rental ($84,000/32,000) $2.625
Equipment leasing costs ($36,000/32,000) $1.125
Variable manufacturing overhead [($225,000*40%)/30,000] $3.00
Total cost per unit to make $17.97
Difference between make and purchase is : $17.97 $17.30 0.67
i. Total costs Make Purchase Difference
Bid price from Marley ($17.30*32,000) $553,600
Equipment lease penalty ($36,000/12)*2 $6,000
Total costs to be purchase $559,600
Direct material ($7.02*32,000) $224,640
Direct labor ($4.20*32,000) $134,400
Factory space rental ($2.625*32,000) $84,000
Equipment leasing costs ($1.125*32,000) $36,000
Variable manufacturing overhead [($3.00*32,000) $96,000
Total costs to make $575,040
Difference between make and purchase is: $575,040 $559,600 $15,440 …show more content…
While making the decision, both qualitative and quantitative factors must be considered. Examples of the qualitative factors in make-or-buy decision are: control over quality of the component, reliability of suppliers, and impact of the decision on suppliers and customers. The quantitative factors are actually the incremental costs resulting from making or buying the component. For example: incremental production cost per unit, purchase cost per unit, production capacity available to manufacture the
i. Cost per unit Make Purchase Difference
Bid price from Marley $ 17.30
Direct material ($195,000/30,000)*1.08 $7.02
Direct labor ($120,000/30,000)*1.05 $4.20
Factory space rental ($84,000/32,000) $2.625
Equipment leasing costs ($36,000/32,000) $1.125
Variable manufacturing overhead [($225,000*40%)/30,000] $3.00
Total cost per unit to make $17.97
Difference between make and purchase is : $17.97 $17.30 0.67
i. Total costs Make Purchase Difference
Bid price from Marley ($17.30*32,000) $553,600
Equipment lease penalty ($36,000/12)*2 $6,000
Total costs to be purchase $559,600
Direct material ($7.02*32,000) $224,640
Direct labor ($4.20*32,000) $134,400
Factory space rental ($2.625*32,000) $84,000
Equipment leasing costs ($1.125*32,000) $36,000
Variable manufacturing overhead [($3.00*32,000) $96,000
Total costs to make $575,040
Difference between make and purchase is: $575,040 $559,600 $15,440 …show more content…
While making the decision, both qualitative and quantitative factors must be considered. Examples of the qualitative factors in make-or-buy decision are: control over quality of the component, reliability of suppliers, and impact of the decision on suppliers and customers. The quantitative factors are actually the incremental costs resulting from making or buying the component. For example: incremental production cost per unit, purchase cost per unit, production capacity available to manufacture the