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BUS 5110 - Managerial Accounting - Unit 4 - Written

Assignment
Managerial Accounting (University of the People)

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BUS 5110 – MANAGERIAL ACCOUNTING

ASSIGNMENT #4 (Unit 4)
February 18th. 2021

TO: Dr. Zelealem Tadesse

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Introduction

In this exercise we will be calculating a Make-or Buy analysis for a company that produces Vacuum

engines. The purpose of the calculations below is to determine whether it’s going to be more cost

effective to produce the engine components in house or whether to go with a third party outsourced

manufacturing company. The Make or Buy Analysis will determine what decisions we need to make and

below are the calculations (Heisinger, K & Hoyle, 2021).

Make-Buy Calculations

Option 1 Make Vacuum Engines In Factory

Per Unit Total Annual Cost Per Unit

at 50,000 Units Price/Cost
(COST TO MAKE)

Sales Revenue 50,000 Units X $150 $7,500,000 $150/Unit

Variable Production
Costs
Direct Materials 75,000 X 12 $900,000 $18/Unit
Direct Labor 100,000 X 12 $1,200,000 $24/Unit

Fixed/Variable
Production Costs
Factory 50,000 X $7.50 $375,000 $7.50/Unit
Overhead
(Variable)
Fixed Factory Direct Labor Cost $1,800,000 $36/Unit
Overhead 100,000X12=1,200,000
(Fixed) /50,000=$24 per Unit
X 150%=$36X50,000=
Total Production Cost $4,275,000 $85.50
Profit (Loss) $3,225,000 $64.50

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Option 2 Buy From Outside Vendors

Per Unit Total Annual Cost at Per Unit Price/Cost

50,000 Units (Cost to
Buy)
Sales Revenue 50,000 Units X $150 $7,500,000 $150/Unit

Cost of Buying
Cost to Buy 50,000 Units X $60 $3,000,000 $60/Unit
Direct
Direct $36/Unit X $1,350,000 $27/Unit
Factory Cost 75%=$27X50,000
Total Cost to Buy $4,350,000 $87/Unit
Total Profit (Loss) $3,150,000 $63/Unit

Comparison of two alternatives (Per Unit)

Option 1 (Make Option 2 (Buy Difference between
Product) Product) two option
Cost to Buy from $0/Unit $60/Unit $(60)/Unit
Outside Vendor
(Variable)
Direct Materials $18/Unit $0/Unit $18/Unit
Cost (Variable)
Direct Labor Costs $24/Unit $0/Unit $24/Unit
(Variable)
Manufacturing $7.50/Unit $0/Unit $7.50/Unit
Overhead (Variable)
Fixed $36/Unit $27/Unit $9.00/Unit
Manufacturing
Overhead (Fixed)
Total Production $85.50/Unit $87.00/Unit $(1.50)/Unit
Costs

Comparison of two alternatives (Total Cost)

Option 1 (Make Option 2 (Buy Difference between
Product) Product) two option
Cost to Buy from $0 $3,000,000 $(3,000,000)
Outside Vendor
(Variable)
Direct Materials $900,000 $0 $900,000
Cost (Variable)
Direct Labor Costs $1,200,000 $0 $1,200,000
(Variable)
Manufacturing $375,000 $0 $375,000

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Overhead (Variable)
Fixed $1,800,000 $1,350,000 $450,000
Manufacturing
Overhead (Fixed)
Total Production $4,275,00 $4,350,000 $(75,000)
Costs

Articulated Methods of Buy or Make Differential Analysis

In order to determine the decision whether to buy or make the products I have to perform a

make-buy differential analysis to determine whether to buy and make the vacuum engines. The

first part of the exercise is to calculate the costs of producing the engine parts in-house. I

included the revenue amount to determine the profit or loss to determine the more profitable

option. On the make side I added the variable costs which included the direct materials and the

direct labor costs as well as the variable factory expenses. Further we added the fixed factory

costs to determine the total cost, and subtracted the total costs from the sales revenue to

determine the profit or loss of producing the engines in house. In my presentation I presented the

full cost as well as the unit costs to give us the cost per unit as well as the full amounts. The

second part of my calculation is to calculate option 2 which is to buy the engines from a third

party vendor. There were two factors that we needed to calculate the option to buy from a third

party. The cost to buy from a third party vendor is $60 per unit and we also had to factor 75% of

the fixed factory overhead to also include into the costing since we still have to pay some of the

fixed costs of our current factory. Once we have tallied up all of the costs from both options the

make and buy options, I created a comparison chart comparing both costs by comparing line

items and eventually comparing the total costs for making the engines as well as buying them to

determine what the most cost effective option is (Corporate Finance Institute, 2021).

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Conclusions and decision

When calculating the costs to make the engines, the total costs to produce the products come to

$4,275,000 or at $85.50 per unit. The cost to buy the engines from a third party vendor will cost

the company is $4,350,000 or at $87 Unit. Once we have concluded the analysis it is clear that it

will cost the company $75,000 more or $1.50 per unit more to buy the engines from a third party

company than to produce the goods in house. Therefore based on this analysis it is prudent for

the company to continue producing the goods in-house as it is more cost effective. However at

some point in the future once the lease or contracts are up for producing in-house and we can

eliminate the 75% of the fixed factory overhead, then we will take another look at the

outsourcing option once we can eliminate the factory overhead fixed costs.

References

Corporate Finance Institute. (2021).Make-or-Buy Decision. Retrieved from

https://corporatefinanceinstitute.com/resources/knowledge/strategy/make-or-buy-decision/

Heisinger, K & Hoyle, J. B. (2021).Accounting for Managers. Retrieved from

https://2012books.lardbucket.org/books/accounting-for-managers/index.html

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