Oxford Engineering manufactures small engines. The engines are sold to manufactu
ID: 2373221 • Letter: O
Question
Oxford Engineering manufactures small engines. The engines are sold to manufacturers who install them in such products as lawn mowers. The company currently manufactures all the parts used in these engines but is considering a proposal from an external supplier to supply the starter assembly used in these engines.
The starter assembly is currently manufactured in Division 3 of Oxford Engineering. Last year, Division 3 manufactured 148,000 starter assemblies, but over the next several years, it is expected that 171,000 assemblies will be needed each year. Total costs related to the starter assembly for last year were as follows:
Direct Material: $266,400
Direct Labor: $227,920
Total Overhead: $444,000
Total: $938,320
Further analysis of overhead revealed the following information:
Tidnish Electronics, a reliable supplier, has offered to supply starter assembly units at $6.80 per unit. If the company buys the assembly from Tidnish, the vacated plant space could be used for storage and, in so doing, avoid $36,000 of outside storage charges currently incurred.
Question: By how much will Oxford Engineering's total profits change if they decide to buy the starter assembly from Tidnish Electronics instead of making it themselves? (Note: if the buy costs are less than the make costs, enter the difference as a positive number; if the make costs are less than the buy costs, enter the difference as a negative number.)
My work:
DM=$266000/148000=$1.79
DL=$227,920/148,000=$1.54
OH=$444,000/148,000=$3
VCU=40%($3)=$1.20
FCU=$3-$1.20=$1.80
Make:
DM=$1.79*171,000=$306,090
DL=$1.54*171,000=$263,340
VOH=171,000*$1.20=205,200
FOH=171,000*$1.80=307,800
Total Annual Cost=$1,082,430
Buy:
DM=$0
DL=$0
VOH=$0
FOH=$118,000
Purchase=171,000*$6.80=$1,162,800
Total Annual Cost=$1,280,800
$1,082,430+36,000-$1,280,800=($162,370)
My solution is wrong, of course, I would really like some guidance as to where I'm thinking wrong and how to solve it correctly.
Explanation / Answer
DM=$266000/148000=$1.79
DL=$227,920/148,000=$1.54
OH=$444,000/148,000=$3
VCU=40%($3)=$1.20
FCU=$3-$1.20=$1.80
Make:
DM=$1.79*171,000=$306,090
DL=$1.54*171,000=$263,340
VOH=171,000*$1.20=205,200
FOH=148,000*$1.80=266400
Total Annual Cost=$1041030
Buy:
DM=$0
DL=$0
VOH=$0
FOH=$118,000
Purchase=171,000*$6.80=$1,162,800
Total Annual Cost=$1,280,800
$1,041,030+36,000-$1,280,800= ($203770)
Profit will increase by $203770
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