Kuat Drive Inc. manufactures machine parts for Star Destroyer engines. CEO Adhi Mundy is considering an offer from a subcontractor to provide 2,000 units of product R2D2 for $120,000. If Kuat Drive does not purchase these parts from the subcontractor, it must continue to produce them in-house with these costs: Cost per unit ($) Direct Materials 28 Direct Labor 18 Variable Overhead 16 Allocated Fixed Overhead 4 Questions: What is the relevant cost to make the product internally? What is the estimated increase or decrease in short-term operating profit of producing the product internally versus purchasing the product from a supplier? Which alternative is more attractive to Kuat Drive Inc, make or buy the machine parts?
Kuat Drive Inc. manufactures machine parts for Star Destroyer engines. CEO Adhi Mundy is considering an offer from a subcontractor to provide 2,000 units of product R2D2 for $120,000. If Kuat Drive does not purchase these parts from the subcontractor, it must continue to produce them in-house with these costs: Cost per unit ($) Direct Materials 28 Direct Labor 18 Variable Overhead 16 Allocated Fixed Overhead 4 Questions: What is the relevant cost to make the product internally? What is the estimated increase or decrease in short-term operating profit of producing the product internally versus purchasing the product from a supplier? Which alternative is more attractive to Kuat Drive Inc, make or buy the machine parts?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Kuat Drive Inc. manufactures machine parts for Star Destroyer engines. CEO Adhi Mundy is considering an offer from a subcontractor to provide 2,000 units of product R2D2 for $120,000. If Kuat Drive does not purchase these parts from the subcontractor, it must continue to produce them in-house with these costs:
|
Cost per unit ($) |
|
| Direct Materials | 28 |
| Direct Labor | 18 |
| Variable |
16 |
| Allocated Fixed Overhead | 4 |
Questions:
- What is the relevant cost to make the product internally?
- What is the estimated increase or decrease in short-term operating profit of producing the product internally versus purchasing the product from a supplier?
- Which alternative is more attractive to Kuat Drive Inc, make or buy the machine parts?
- What strategic considerations likely bear on this make vs buy decision? (at least 2 considerations)
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