Question

Note that I do not ask you for the total costs if the firm makes and the total costs if the firm buys, but instead I ask you for the difference between these two total cost numbers. Make sure that you read the question carefully so that you can attach the correct sign (+ or- to your numerical answer Oxford Engineering manufactures small engines. The engines are sold to manufacturers who install them in such products as lawn mowers. The company currently manufactures all the parts used in these engines but is considering a proposal from an external supplier to supply the starter assembly used in these engines. The starter assembly is currently manufactured in Division 3 of Oxford Engineering. Last year, Division 3 manufactured 161,000 starter assemblies, but over the next several years, it is expected that 181,000 assemblies will be needed each year. Total costs related to the starter assembly for last year were as follows Direct material $360,640 Direct labor $231,840 Total overhead $805,000 Total $1,397,480 Further analysis of overhead revealed the following information 45% of total overhead was variable. $128,000 of the fixed overhead were allocated costs that will continue even if the production of the starter assembly is discontinued. Tidnish Electronics, a reliable supplier, has offered to supply starter assembly units at $5.80 per unit. If the company buys the assembly from Tidnish, the vacated plant space could be used for storage and, in so doing, avoid $37,000 of outside storage charges currently incurred. REQUIRED 1. By how much wll Oxford Engineering's total profits change if they decide to buy the starter assembly from Tidnish Electronics instead of making it themselves? (Note: if the buy costs are less than the make costs, enter the difference as a positive number; if the make costs are less than the buy costs, enter the difference as a negative number) Submit Answer Tries 0/8 Send Feedhack

Answer 1

Answer:

$375,280

Working:

Given that:

45% of the total cost was variable.

Hence:

Variable overhead = 805000 * 45% = $362,250

Fixed overhead = 805000 * (1 - 45%) = $442,750

Since expected assemblies for next several years = 181,000, total expected variable cost to 'make' will be as follows:

For units For units- Per Unit 161,000 181,000 Variables costs: Direct material $360,640 $2.24 $405,440 $231,840 $1.44 $260,640 Direct labor Variable Overhead $362,250$2.25$407,250 $954,730 $5.93 $1.073,330 Total

Incremental cost / (benefit) analysis is as follows:

Incremental cost/(benefit) analysis for 181,000 units Cost to Incremental cost Cost to 'Make" (saving) to 'Bu (S405,440) ($260,640) (S407,250) ($314,750 $1,049,800 Bu $405,440 Direct material $0 $260,640 $407,250 $442,750$128,000 $0 $1,049,800 Direct labor $0 Variable Overhead $0 Fixed Overhead Purchase cost @$5.80 SO ($37,000 $1,516,080 $1,140,800 ($37,000 Saving in storage charges 5375.280) Total

'Buy' cost are lesser by $375,280