Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

(TCO D) McMullen Co. manufactures automatic door openers. The company uses 15,00

ID: 2345967 • Letter: #

Question

(TCO D) McMullen Co. manufactures automatic door openers. The company uses 15,000 electronic hinges per year as a component in the assembly of the openers. You have been engaged by McMullen to assist with an evaluation of whether the company should continue producing the hinges or purchase them from an outside vendor.

The Accounting Department provided the following detail regarding the annual cost to produce electronic hinges:
Direct materials $54,000
Direct labor 60,000
Variable manufacturing overhead 36,000
Fixed manufacturing overhead 90,000
Total costs $240,000


The Procurement Department provided the following supplier pricing: Supplier A price per hinge $11.00
Supplier B price per hinge $10.75
Supplier C price per hinge $10.50

The supplier pricing was obtained in response to a formal request for proposal (RFP). Procurement has determined these suppliers meet McMullen's technical specifications and quality requirements.

If McMullen stops producing the part internally, 10% of the manufacturing overhead would be eliminated.

Required: Prepare a make-or-buy analysis showing the annual advantage or disadvantage of accepting an outside supplier's offer

Explanation / Answer

make

buy - A

buy - B

buy - C

Direct material

54000

0

0

0

Direct labor

60000

0

0

0

Variable MOH

36000

0

0

0

Fixed MOH

90000

81000

81000

81000

Price to buy

0

165000

161250

157500

total cost

240000

246000

242250

238500

The lowest cost would be buying from C.

make

buy - C

net income increase(decrease)

Direct material

54000

0

54000

Direct labor

60000

0

60000

Variable MOH

36000

0

36000

Fixed MOH

90000

81000

9000

Price to buy

0

157500

-157500

total

240000

238500

1500

Buying from C would increase net income by $1500 annually compared to making.

make

buy - A

buy - B

buy - C

Direct material

54000

0

0

0

Direct labor

60000

0

0

0

Variable MOH

36000

0

0

0

Fixed MOH

90000

81000

81000

81000

Price to buy

0

165000

161250

157500

total cost

240000

246000

242250

238500