Should Mazak acquire TXR outside

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Reference no: EM132899454

Make vs Buy

Exercise #1

Western Company makes their own sub-product (handles) used in the manufacturing process (lawnmowers) the unit cost per handle is as follows:

DM $ 4

DL $ 5

Var. Ohd . $ 2

Fixed Ohd. $ 3*

$14

* Fixed manufacturing overhead related to the Handle Division is $150,000 spread over 50,000 handles.

Western Co. can buy 50,000 handles from an outside supplier for $12 per handle.

Reducing production of handles will reduce fixed costs by only $17,000 as many of the costs such as plant insurance, taxes, amortization will not change. The area used currently to make handles can be leased out to earn $14,000.

Should they MAKE or BUY?

Make vs. Buy

Exercise #2

Queen Company makes 20,000 units of Part R-3 each year. At this level of activity, the cost per unit for Part R-3 is:

Direct Materials $4.80

Direct Labour 7.00

Variable mfg overhead 3.20

Fixed mfg overhead 10.00

Total Cost per Part $25.00

An outside supplier has offered to sell 20,000 units of Part R-3 each year to Queen for $23.50 per part. If Queen accepts the offer, the facilities currently used to make R-3 can be rented out to another company for $150,000 per year.

Queen has calculated that $6 of the fixed manufacturing overhead being applied to R-3 would continue even if the part is purchased from the outside supplier.

REQUIRED: How much will profit change if the outside offer is accepted?

Make vs. Buy

Exercise #3

Mazak Corp. manufactures a component TXR for use in making a computerized lathe.

Normal unit production costs for TXR (based on production of 1,000 units) are:

Direct Materials $250

Direct Mfg. Labour $110

Mfg. Ohd.

Variable $120

Fixed $160

-------

Total Mfg. Cost per unit $640

-------

Mazak can purchase a TXR equivalent outside for $600 per unit.

They could then switch their current facilities to make QST. This QST would produce a net relevant amount of $80,000.

In addition, $100,000 of fixed costs related solely to TXR could be eliminated.

Should Mazak acquire TXR outside?

Attachment:- Relevant Decision Making.rar

Reference no: EM132899454

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