Question

. Hahn Manufacturing purchases a key component of one of its products from a local supplier. The current purchase price is $1,500 per unit. Efforts to standardize parts succeeded to the point that this same component can now be used in five different products. Annual component usage should increase from 150 to 750 units. Management wonders whether it is time to make the component in-house rather than to continue buying it from the supplier. Fixed costs would increase by about $40,000 per year for the new equipment and tooling needed. The cost of raw materials and variable overhead would be about $1100 per unit, and labor costs would go up by another $300 per unit produced.

1. Should Hahn make rather than buy?

2. What is the break-even quantity?

3. What other considerations might be important

Answer 1

Answer:

Explanation:

(a) should Hahn make rather than buy?

Quantity of key component needed = 750 units

If key component is procured from local supplier = number of units procured*cost per unit  = 750 units * $1500 per unit = $1,125,000

If key component is made in-house:

Total cost of raw materials, variable overhead, labor costs per unit = $1100 + $300 = $1400 per unit

Total variable cost of raw materials, labor, overheads = $1400 per unit * number of units  = $1400*750 = $1,050,000

Total fixed costs = $40,000

Total costs = Total fixed costs + Total variable costs = 40,000 +1,050,000 = $1,090,000

Cost of making in-house ($1,090,000) is less than cost of buying from local supplier ($1,125,000)

So, Hahn should make.

(b) what is the break-even quantity?

Break-even quantity - "x". At BREAK EVEN point the costs of making and the cost of buying is equal.

cost of buying = 1500x

cost of making = fixed+variable costs = 40,000 + 1400x

SO, at break even, 1500x = 40,000 + 1400x

100x = 40,000

or x = 400 units. This is the break even quantity

(c) what other considerations might be important?

Other considerations are:

Timely delivery - timely delivery of components by supplier

Quality - quality of goods supplied

Answer 2

1. Hahn Manufacturing should make the products, this is because the total production cost for in-house making is less than the total of buying.

The making cost is $1,090,000 while the buying cost is $1,125,000.

2. The break-even quantity is 400 units.

3. The other important considerations for the decisions are:

• time of delivery from the supplier in case of buying.

• quantity of goods supplied or produced.

Computations:

1.  The computation of the total cost of making and buying are computed as follows:

$\begin{aligned}\text{Cost of purchase}&=\text{No. of units to be procured}\times\text{Cost per unit}\\&=750\;\text{units}\times\ 1,500\;\text{per unit}\\&=\ 1,125,000 \end{aligned}$

$\begin{aligned}\text{Cost of Making}&=\text{Total fixed costs}+\text{Total variable cost}\\&=\ 40,000+\ 1,05,000\\&=\ 1,090,000 \end{aligned}$

Working Note:

The computation of total variable cost:

$\begin{aligned}\text{Total Variable cost}&=\text{No. of units produced}\times\text{Cost per unit}\\&=750\;\text{units}\times\left(\text{Cost of raw materials, variable}+\text{Cost of labor} \right )\\&=750\;\text{units}\times\left(\ 1,100+\ 300 \right )\\&=750\;\text{units}\times\ 1,400\\&=\ 1,050,000 \end{aligned}$

2. The break-even quantity is computed as follows:

$\begin{aligned}\text{Cost of Making per unit}&=\text{Fixed cost}+\text{Variable cost}\\\ 1,500\;\text{of x}&=\ 40,000+\ 1,400\;\text{of x}\\\ 1,500\;\text{of x}-\ 1,400\;\text{of x}&=\ 40,000\\\ 100\;\text{of x}&=\ 40,000\\\text{x}&=\frac{\ 40,000}{\ 100}\\\text{x or Break-even Quantity}&=400\;\text{units} \end{aligned}$

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