$ 400,000 Direct materials Direct manufacturing labor 300,000 Manufacturing overhead 800,000 $1,500,000 Total
Make or buy, unknown level of volume. (A. Atkinson, adapted) Denver Engineering manufactures small engines that it sells to manufacturers who install them in products such as lawn mowers. The company currently manufactures all the parts used in these engines but is considering a proposal from an external supplier who wishes to supply the starter assemblies used in these engines.
The starter assemblies are currently manufactured in Division 3 of Denver Engineering. The costs Relating to the starter assemblies for the past 12 months were as follows:
Over the past year, Division 3 manufactured 150,000 starter assemblies. The average cost for each starter
assembly is $10($1,500,000 150,000).
Further analysis of manufacturing
- Tutwiler Electronics, a reliable supplier, has offered to supply starter-assembly units at $8 per unit. Because this price is less than the current average cost of $10 per unit, the vice president of manufacturing is eager to accept this offer. On the basis of financial considerations alone, should Denver Engineering accept the outside offer? Show your calculations. (Hint: Production output in the coming year may be different from production output in the past year.)
- How, if at all, would your response to requirement 1 change if the company could use the vacated plant space for storage and, in so doing, avoid $100,000 of outside storage charges currently incurred? Why is this information relevant or irrelevant?
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