Hahn Manufacturing has been purchasing a key component of one of its products fr

Question

Hahn Manufacturing has been purchasing a key component of one of its products from a local supplier. The current purchase price is $1400 per unit. Efforts to standardize parts have succeeded to the point that this same component can now be used in five different products. Annual component usage should increase from 150 to 800 units. Management wonders whether it is time to make the component in-house, rather than to continue buying it from the supplier. Fixed costs would increase by about $60,000 per year for the new equipment and tooling needed. The cost of raw materials and variable overhead would be about $1000 per unit, and labor costs would go up by another $250 per unit produced.

1. Should Hahn make rather than buy?

2. What is the break-even quantity?

3. What percent discount would make "buy" better than "make"?

Explanation / Answer

No.of units = 800

Fixed costs = $ 60,000 additional

variable raw material + overhead = $1000 per unit

variable labor = $ 250 per unit

total variable = 1250, current purchase price = 1400, contribution margin = $ 150 per unit

total contribution margin = 150 * 800 = $120,000

Savings = Contribution margin - additional fixed costs = 120000 - 60000 = $ 60,000, so Hann should make rather than buy

break even qty = fixed costs/ conribution margin = 60,000/150 = 400 qty

So a total discount of anything above $ 60,000 for 800 qty would make a "buy" better than "make"

i.e. 60000/800 = $75 a discount of $75 or above would make it "buy" better than "make"

which in percentage terms is 5.35%

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.