Suppose a BMW executive in Germany is trying to the company should continue to manufacture an engine component or purchase it from Frankfurt Corporation for $50 each in the next year. Demand for the coming year is expected to be the same as for the current year, 200,000 units. Data for the current year is as follows:
Suppose a BMW executive in Germany is trying to the company should continue to manufacture an engine component or purchase it from Frankfurt Corporation for $50 each in the next year. Demand for the coming year is expected to be the same as for the current year, 200,000 units. Data for the current year is as follows:
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:(1) Prepare a schedule that compares the make-or-buy alternatives. Show totals and
r unit. Compute the numerical difference between making and buying.
Assume that the capacity now used to make the components will become idle if the
amounts per
components are purchased.
(2) Assume also that the BMW capacity in question can be rented to a local
electronics firm for $1,150,000 for the coming year. Prepare a schedule that
compares the net relevant costs of the three alternatives: make, buy and leave
capacity idle buy and rent. Which is the most favorable alternative? By how much
in total?
Transcribed Image Text:装
Suppose a BMW executive in Germany is trying to decide whether
the company should continue to manufacture an engine component or purchase it
from Frankfurt Corporation for $50 each in the next year. Demand for the coming
year is expected to be the same as for the current year, 200,000 units. Data for the
current year is as follows:
Direct material
Direct labor
Factory overhead, variable
Factory overhead, fixed
Total costs
$5,000,000
$1,900,000
$1,100,000
$3,000,000
$11,000,000
If BMW makes the components, the unit costs of direct material will increase by
10%. If BMW buys the components, 30% of the fixed costs will be avoided. The
other 70% will continue regardless of whether the components are manufactured or
purchased. Assume that variable overhead varies with output volume.
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