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Eldon Engine: Make or buy decision

1. Eldon Engine, Inc., produces engines for the watercraft industry. An outside manufacturer has offered to supply several component parts used in the engine assemblies, which are currently being produced by Eldon. The supplier will charge Eldon $620 per engine for the set of parts. Eldon's current costs for those part sets are direct materials, $360; direct labor, $180; and manufacturing overhead applied at 100% of direct labor. Variable manufacturing overhead is considered to be 30% of the total, and fixed overhead will not change if the part sets are acquired from the outside supplier.

Required:

If Eldon Engine, Inc., accept the offer to purchase the parts, what would be the net advantage per engine of purchasing?

Advantage to make: $____________

2. Product S has a contribution margin of $150 per unit and requires three hours of machine time. Product T requires four hours of machine time and provides $200 of contribution margin per unit.

If the capacity of machine time is limited to 600 hours and only one product can be produced, what is the maximum amount of contribution that could be generated?

Maximum amount of contribution $:__________

Solution Preview

1 - Total variable cost if producing = 360 + 180 + 180*30% = 540 + 54 = ...

Solution Summary

The solution decides whether to make or buy components parts for Eldon Engine to maximise the contribution margin.

$2.19