Annakin Co. uses a particular part in assembling its Lifesaver product. Luke Co.

Question

Annakin Co. uses a particular part in assembling its Lifesaver product. Luke Co. the supplier of that part has just increased its price for 2013. Luke Co's price for the part will rise from $9 to $10 per unit for the first 5,000 units ordered by Annakin CO. during 2013. All units ordered during 2013 above 5,000 cumulative total will remin at the $9 per unit price. Luke Co. claims rising greenhouse gas emmissions and its ability to control the market as reasons for the price rise. Annakin is very upset over the price rise, the third over the past two years. Annakin is seriously evaluating the manufacture of the particular part in its factory since its already HAS EXCESS CAPACITY AVAILABLE. Annakin Co. uses 7,500 units of the particular part each year. Estimated unit cost to produce the part in its own factory would be: Direct Materials.....$3.50 per unit Direct Labor..........$4.10 per unit Variable Factory Overhead....$1.75 per unit Fixed Factory Overhead....$1.25 per unit a) prepare a differential analysis for the make-or-buy decision, considering the 2013 differential costs. b) should Annakin Co. continue to buy the part or manufacture it?

Explanation / Answer

a) prepare a differential analysis for the make-or-buy decision, considering the 2013 differential costs.
                                                                      Incremental
                                Make            Buy        Increase/(Decrease)
Purchase costs
5,000 x $10                                $50,000
2,500 x $9                                  $22,500
Total                                          $72,500       ($72,500)
Direct materials
7,500 x $3.50              $26,250                       $26,250
Direct labor
7,500 x $4.10              $30,750                       $30,750
Variable overheads
7,500 x $1.75              $13,125                       $13,125
Fixed FOH                                              Irrelevant costs
                                 ______________________________
                                 $70,125     $72,500      ($2,375)
                                ===============================

b) should Annakin Co. continue to buy the part or manufacture it? Annakin should make the parts in-house as it would save $2,375 over buying parts from Luke Co.

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