Question

Alanco, Inc. manufactures a variety of products and is currently manufacturing all of their own component parts. An outside supplier has offered to sell one of those components to Alanco. To evaluate this offer, the following information has been gathered relating to the cost of producing the component internally:
Direct Materials $4
Direct Labor $6
Variable Manufacturing Overhead $2
Fix Manufacturing Overhead, Traceable* $5
Fix Manufacturing Overhead, Common but Allocated $8
Total Cost $25.00
Supplier Price = $21
Units Per Year = 12,000
Fix manufacturing overhead, traceable is composed of two items:
Depreciation of Equipment: 30%
Supervisor Salary: 70%
Assuming the company has no alternative use for the facilities now being used to produce the component, complete the following analysis to determine if the outside supplier's offer should be accepted.
Based on this analysis, write an if statement to determine if Alanco should make or buy the component.
Alanco should ............. the component.
3 Per Unit Differential Cost 12,000 units
Make Buy Make Buy
Cost of purchasing
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
total costs,
Based on this analysis, wrie an if statement to determine if Alanco should make or buy the component. Alanco should the _____________component

Answer 1

Answer:

If the company decides to purchase the component from the outside supplier, its operating income will decrease by $66,000 per year. Therefore, Alanco should keep producing the component.

Explanation:

cost of producing the component (per unit):

direct materials $4

direct labor $6

variable manufacturing overhead $2

fixed manufacturing overhead, traceable $5 (non avoidable $1.50)

fixed manufacturing overhead, not traceable $8

total cost per unit = $25

units per year = 12,000

price offered by supplier $21 per unit

                         alternative A         alternative B       differential

                         keep producing    buy                      amount

purchase cost                        $0    $252,000          ($252,000)

avoidable man.

costs                 $186,000              $0                        $186,000

total                  $186,000              $252,000           ($66,000)

if the company decides to purchase the component from the outside supplier, its operating income will decrease by $66,000 per year.

Answer 2

Based on the make or buy analysis, Alanco Inc. should continue to manufacture the 12,000 components annually.

It will save $66,000 if it makes the components internally but loses the same amount if it buys it from the outside supplier.

Data and Calculations:

Relevant / avoidable costs:

Direct Materials                 $4

Direct Labor                      $6

Manufacturing Overhead $2

Supervisor's salary           $3.5 ($70% x $5)

Variable manufacturing cost per unit = $15.50

Supplier Price =              $21

Units Per Year =        12,000

Total relevant cost of production = $186,000 ($15.50 x 12,000)

Total relevant cost of outside purchase = $252,000 ($21 x 12,000)

Difference in cost = $66,000 ($252,000 - $186,000)

Thus, Alanco should continue to manufacture 12,000 units of the components annually instead of buying from the supplier.

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